Zim now in fiscal crisis

Finance minister Patrick Chinamasa’s mid-term fiscal policy review statement to parliament yesterday confirmed what we have been saying all along: Zimbabwe has plunged headlong into a fiscal crisis and the spendthrift government now appears increasingly incapable of preventing a full-blown economic catastrophe.

Zimbabwe Independent Comment

The government’s gross mismanagement is amplified by the issuance of Treasury Bills (TBs) to the tune of US$2,1 billion last year, worsening a fiscal crisis whose tragic consequences are yet to be fully revealed. As we report in these pages today, the limited budgetary support from developmental partners and declining revenues due to the underperformance of key economic sectors have forced the authorities to depend on TBs to finance capital expenditure and social spending. The debt spiral has intensified as Treasury continues issuing debt instruments almost half the size of the national budget. Zimbabwe’s debt stock has shot up to US$11,3 billion from US$9,4 billion in 2015. This is blighting the country’s credit rating.

Imara Asset Management chief executive John Legat earlier this month raised the red flag over the current holdings of TBs, which he said could destabilise the fragile banking sector.

Official statistics show that, at current levels, TBs held by commercial banks are now 1,7 times the level of bank equity capital, up from 1,3 times at the end of 2016. This is unsustainable.
Legat’s warning is worth repeating here.

“In our view this ratio should be setting off alarm bells in the banks’ boardrooms, but clearly it is not. Looking at various bank balance sheets at end May, CBZ would be most exposed with a ratio of over four times equity followed by ZB at two times. Looking at it from the commercial banking sector’s perspective, though, their total deposits have risen by US$330 million to US$5,2 billion during the first quarter,” said Legat in a research note titled The Great Illusion.

“Loans to the private sector are lower than a year ago, reflecting managements’ lack of interest in lending to the private sector where non-performing loans have been a problem for them. The private sector has been largely crowded out by government. So banks have channelled their rising deposits back into TBs. They have all but curtailed the ability of depositors to withdraw their money in the form of cash, hence the long queues that now exist outside the banks.”

Given next year’s general elections, it seems highly unlikely that the government will meet a budget deficit for the full year of just US$400 million, Legat said. He is spot-on. This week, the Zimbabwe Electoral Commission dropped a bombshell by announcing that the electoral supervisory body needs US$274 million for the 2018 elections.

The country’s unsustainable trade deficit, poor balance of payments position as well as massive revenue leakages and uneven distribution of liquidity in the market are also seen as the major reasons behind the cash shortages buffeting the economy.

But as the authorities drag their feet in implementing much-needed economic reforms, the crisis is fast morphing into a man-made catastrophe.

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