Government’s TB binge could trigger inflation crisis, experts say

Source: Government’s TB binge could trigger inflation crisis, experts say | The Financial Gazette June 8, 2017

THE disclosure by government this week that it had issued Treasury Bills (TBs) worth US$600 million to power utility ZESA Holdings has raised fears of a fiscal crisis, with analysts warning of an “unsustainable build-up of domestic debt” which could undermine government spending on social programmes and capital projects.

The development could also have serious “ramifications on the country’s inflation outlook”, said Howard Sithole, an economist and former banker. It also flies in the face of International Monetary Fund (IMF) recommendations for government to refrain from central bank financing of the deficit and containing the issuance of debt and quasi-currency instruments.
The TBs issued to ZESA are for debts owed by parastatals, local authorities and fertiliser manufacturer, Sable Chemicals, the permanent secretary in the Ministry of Energy and Power Development, Partson Mbiriri, told a Parliamentary Committee on Mines and Energy this week.

The issuance of TBs to ZESA implies that government has assumed Sables’ and parastatals and local authorities’ debts to ZESA. That debt on government’s books will attract interest worsening the debt servicing burden and intensifying fiscal pressure already evidenced by failure to honour bonus payment commitments and delayed payment of civil servants salaries.

Finance and Economic Development permanent secretary, Willard Manungo, also revealed on Tuesday that government was also contemplating issuing TBs worth US$400 million to bail out the National Railways of Zimbabwe in its recapitalisation drive should private partners fail to support the rail transporter.
This will swell the debt to US$1 billion between the two parastatals, both of which have for many years been a burden on the fiscus.

“This is simply a re-organisation of problems,” said Witness Chinyama, a Harare-based economist and entrepreneur.
“Government is failing to address the fundamental problem that has led to parastatals and local authorities failing to pay their debts to ZESA. That problem is a bad economy,” Chinyama said.

Chinyama said it would be positive if the injection of TBs to ZESA and the NRZ were to result in transformation of the two parastatals. But he was doubtful.

“One of the major failures of our economic reform programmes, including ESAP, was the lack of public sector reforms, particularly parastatal reforms. This has been tied up to our economic problems,” he said.
ESAP was an economic structural adjustment programme adopted but later abandoned in the 1990s.
Sithole agreed, saying his major fear was that government was now contributing to “excessive monetary growth which has ramifications on the country’s inflation outlook”.
“Excessive government borrowing is increasing domestic debt and associated debt service payments,” he said, indicating that much of government’s borrowing was “going towards employment costs and not apex (capital expenditure), which is bad for the country’s long-term growth prospects”.

Excessive government borrowing crowds out the private sector by competing for loanable funds, he said.
“Government borrowing is making it difficult for development institutions such as the Infrastructure Development Bank of Zimbabwe to mobilise domestic funding for infrastructure borrowing. Government needs to address its expenditures in order to bring them in line with current revenue collection,” said Sithole.

In April, Finance and Economic Development Minister, Patrick Chinamasa, said government had, since 2014, issued TBs amounting to US$4, 417 billion to raise money to fund its expenditure as well as legacy debts.

These included servicing government debt; the Reserve Bank of Zimbabwe debt; recapitalisation of parastatals; and take-over of collateralised non-performing loans by Zimbabwe Asset Management Corporation.
He said then that a total of US$1,102 billion had matured and been liquidated, leaving an outstanding amount of US$3,315 billion as at March 3, 2017.

Chinamasa admitted that government was resorting to borrowing because it did not have money.
“Government remains a major economic player in the market. It draws services from both private and public institutions. These services should, however, be paid for. Unfortunately, government has, over the years, been ‘consuming’ these services without paying for them resulting in the accumulation of domestic arrears,” he said.
At the conclusion of its Article IV Visit to Zimbabwe last month, an IMF mission said government spending pressures emanated from high employment costs, government transfers to support specific economic sector, and elevated discretionary expenditure.

“Action on these three fronts, while safeguarding social outlays, is therefore crucial,” the mission advised.
But with elections expected next year, it is inconceivable President Robert Mugabe’s government will capitulate.