US$7,6bn TBs wreak market havoc

Source: US$7,6bn TBs wreak market havoc – The Zimbabwe Independent October 8, 2018

THE stock of Treasury Bills (TBs) issued by government, which has increased to US$7,6 billion by end of August from US$2,1 billion in 2016, is crowding out the private sector from borrowing for productive purposes while increasing monetary supply, hence fuelling inflationary pressures in the economy.

BY TINASHE KAIRIZA

The rise in issuance of TBs — which are draining hard currency, fuelling inflationary pressures and destabilising the financial system — represents a 261,9% jump in the issuance of the promissory note, amid mounting budgetary pressures emanating from government’s appetite to spend money it does not have.

On average, government has issued TB debt securities worth US$275 million every month over the last two years, to finance a widening budget deficit estimated at US$1,3 billion.

TBs are short-term debt obligations backed by the government with a maturity of less than one year, while Treasury bonds have a maturity duration of more than one year.

Zimbabwe, currently barred from accessing fresh lines of credit from international financial institutions after failing to settle a huge external debt stock estimated at US$7,4 billion and arrears, has resorted to issuing TBs to finance various budgetary priorities and profligacies.

Statutory paper issued by government soared from US$4,417 billion in 2017 to nearly US$8 billion this year, as government borrowed heavily on the domestic market to finance a widening budget deficit, a situation which investment analysts say has crowded out the private sector from accessing lines of credit locally. Although government has not defaulted on honouring the statutory paper upon maturity, investment analysts contend that government’s excessive borrowing on the domestic market had the effect of crowding out the private sector which is in dire need of fresh lines of capital required for retooling and revitalising operations.

In July, central bank chief John Mangudya argued that the risk of taking up statutory paper was less for banks, rather than extending loans to the country’s struggling private sector.

“The issue about the crowding out effect does not exist because the banks have a choice to give a loan to the private sector, or credit to government. Banks choose to give loans to government because they believe government paper is more secure,” Mangudya said in July during a bank survey presentation, noting that the private sector should come up with bankable projects.

However, in a major policy turn around, Finance and Economic Development minister Mthuli Ncube outlined a range of interventions accompanying presentation of the Monetary Policy Statement by Mangudya this week, centred around the need to “crowd in” the private sector by reversing the issuance of TBs by government.

“In 2014, Treasury Bills to Gross Domestic Product (GDP) ratio was at 4,4% and has increased sharply to 36,5% by end of August 2018. Accordingly, government in its management of domestic borrowing is reviewing the use of Treasury Bills in support of socio-economic development programmes.

“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,” Ncube said while outlining a raft of austerity measures meant to realign Zimbabwe’s fragile economy on a firm recovery and growth path.

The issuance of statutory paper, which government has relied upon to finance an unsustainable budget deficit, has largely been blamed for driving the demand for scarce foreign currency as well as creation of excess money supply, which is mostly in the form of Real-Time Gross Settlement (RTGS) and mobile transactions.

Ncube, who is today expected to spell out a fresh plan to set Zimbabwe’s frail economy on a steady recovery and growth path, outlined that “issuance of Treasury Bills in the future will only be through the auction system.”