Source: Govt tightens TBs issuance | The Herald October 3, 2018
Enacy Mapakame Business Reporter
Government is working to curtail the unrestrained issuance of Treasury Bills (TBs) as the stock of the short-term debt instruments, the major driver of fiscal disequilibrium, has ballooned by 261 percent to $7,6 billion in the past two years.
This forms part of a raft of fiscal measures to reduce excessive printing of electronic dollars, which are piling pressure on banks to provide matching amounts of foreign currency, to rebalance the economy for sustainable growth.
To finance unsustainable national deficits, the Government had mainly resorted to domestic borrowing with the use of instruments such as TBs, overdrafts with the central bank and loans from the private sector.
In light of this, TBs to gross domestic product (GDP) ratio therefore shot to 35,6 percent as at end of August from 4,4 percent in 2014. The central bank said the TBs had the inadvertent effect of diluting foreign earnings for major earners of the hard currency, creating challenges for the “goose that lays the golden egg”.
Market analysts say unrestrained issuance of TBs is unsustainable as it has exerted pressure on banks to provide matching value of foreign currency, as demand for foreign currency increases and companies require more hard currency to import key raw materials.
Economist Andy Hodges commended the Government and central bank for separating nostro FCAs and RTGs FCAs, due to the negative impact of fiscal imbalances, and their pledge to cut on public expenditure.
Mr Hodges said separating nostro FCAs and RTGs FCAs, in what authorities said strengthened the multi-currency system, would also guarantee access to foreign currency by major earners for the hard currency.
“The minister and the Reserve Bank at least acknowledge that Government expenditure was too high.
“When you are talking about $2,1 billion overdrafts at the Reserve Bank instead of $764 million, it is clear that Government has to tighten their belt. This is why the President was talking about austerity measures,” he said.
Fiscal and monetary authorities both agree that the chaos on the parallel markets, fuelled by demand for foreign currency, is being driven by fiscal imbalances, which Government has committed to end by living within its means.
Finance and Economic Development Minister Professor Mthuli Ncube said on Monday that the ballooning TBs balance was a cost to Government, which necessitated measures to contain the situation.
In future, he said, any issuance of TBs would be through the auction system, a more market oriented system, which is meant to improve the process of price discovery, better pricing, transparency and confidence building.
“To date, Treasury Bill issuances have increased from $2,1 billion in 2016 to a cumulative $7,6 billion, by end of August 2018. In 2014, TBs to GDP ratio was at 4,4 percent and has increased sharply to 36,5 percent by end of August 2018.
“This is a cost to Government. Excessive issuance of short-term debt instruments at high interest rate also crowds out the private sector and compounds the increase in Government recurrent expenditure.
“Accordingly, Government in its management of domestic borrowing is reviewing the use of Treasury Bills in support of socio-economic development programmes,” Minister Ncube said.
Further, in order to mop up excess liquidity, Minister Ncube said the Government had introduced a 5 percent statutory reserves requirement for banks, a strategy he referred to as a “nuclear weapon in monetary economics”.
A huge chunk of Government’s finances has been going towards paying recurrent expenditure in the form of civil servants wage bill.
Oversupply of RTGS, Reserve Bank Governor John Mangudya said, was the source of disparities between the demand for foreign currency and banks’ capacity to meet the demand for the hard currency.
To guarantee availability of foreign currency by major exporters and instil confidence in the market, the RBZ has since directed banks to separate nostro foreign currency accounts and RTGS foreign currency accounts.
But the central bank chief stated in no uncertain terms that the relationship between the two will be that they rank pari passu (1 to1), meaning that the economy remains anchored by a multi-currency system.
“It means as we increase those electronic dollars it is reducing the motivation for those with their own foreign currency. So this measure is supposed to increase confidence. That is why we are providing further assurance by providing further guarantees for those things (Nostro FCAs),” Dr Mangudya said.
Analysts say if the rate at which TBs have been issued is to be unmanned; this will have far reaching consequences on the economy.
As such, Prof Ncube said issuance of TBs will seek to finance Government’s vital
socioeconomic development programmes by use of instruments that will “crowd in” the private sector, including public privatepartnerships
or Government guarantees to financial institutions.
“Such guarantees will only be a contingent liability to Government, unlike Treasury Bills that have a direct and immediate cash flow implication on Government.
“In addition, recourse to the guarantee scheme would require demonstration by a financial institution that they have made best effort in seeking to recover the loan from a borrower,” said Prof Ncube.
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