Financial Gazette (Harare)
Bernard Mpofu
5 December 2011
FINANCE Minister, Tendai Biti, has turned down a proposal by the Bankers Association of Zimbabwe (BAZ) to re-introduce Treasury bills (TBs) in bid a to improve the country’s cash-strapped money market over fears that the move could escalate government domestic debt, The Financial Gazette’s Companies & Markets can report.
Addressing business leaders at a post-National Budget breakfast meeting in the capital on Friday, Biti said government would consider introducing the financial instruments in future after dealing with the huge debt overhang.
He said re-introducing TBs would expose the National Budget to debt. He has indicated since becoming Finance Minister that government had to “eat what we gather”, implying it had to live within the restricted cash environment brought about by the new currency regime.
“We have taken a cautious approach towards attracting a domestic debt due to pressure that our sovereign debt is putting on our shoulders,” Biti said, responding to BAZ chairperson, John Mushayavanhu, who had raised questions over government’s rejection of the bankers’ suggestion.
Sovereign debt is government debt normally held in bonds denominated in foreign currencies. Under the doctrine of sovereign immunity, the repayment of sovereign debt cannot be forced by the creditors and it is thus subject to compulsory rescheduling, interest rate reduction, or even repudiation.
The only protection available to the creditors is threat of the loss of credibility and lowering of the international standing.
Zimbabwe is already in protracted arrears with international creditors, including the International Monetary Fund and the World Bank, a factor that has caused significant trepidation among international lenders who were meant to bankroll the country’s economic reforms under the current inclusive government.
Besides arrears on foreign debt, government has also been unable to meet its domestic debt commitments, some of which could easily now be write-offs, particularly those emanating from Treasury bill instruments issued under the Zimbabwe dollar regime.
TBs have traditionally been used to raise cash on the domestic market by the central bank on behalf of government, but were abolished upon dollarisation in 2009.
This left several banks exposed as much of the TB instruments had been in the Zimbabwe currency which was ditched by the country in favour of a multi-currency system dominated by the US dollar.
This choked domestic banks that had to grapple with a cash crunch that had been exacerbated after the Zimbabwe dollar-prescribed capital levels for the banks became obsolete, forcing the Reserve Bank of Zimbabwe (RBZ) to put in place new US dollar-denominated capital levels which some banks are still struggling to meet.
TBs are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the return to the holder.
The money market instruments can be used by banks to secure overnight accommodation between banks and overnight accommodation from the RBZ under the lender-of-last-resort arrangement.
Currently, the interbank market is largely inactive due to cash shortages as well as the fact that the central bank has been unable to execute its function of lender-of-last-resort since Zimbabwe ditched its currency.
Economist, Witness Chinyama, who heads the research unit at Kingdom Financial Holdings Limited, said Biti’s apprehension over the TB issue did not inspire confidence on the markets as that sent signals to foreign investors that government was still wary of defaulting on its new commitments.
“The money market is very thin at the moment. TBs would improve liquidity. The current cash budgeting is a stop-gap measure to rein in expenditure. But, eventually, government will have to resort to the market particularly if the economy continues to improve,” said Chinyama.
Chinyama said if the TBs were re-introduced in the market and government paid its debt on maturity, market confidence would be restored and this would help attract both portfolio and foreign direct investment into the country.
Last week, Biti introduced a US$100 million fund to boost the central bank’s lender-of-last-resort function after facing criticism over the meagre US$7 million advanced last year to revive the facility.
He, however, said the modus operandi of the fund was yet to be finalised. Biti said the US$100 million fund was jointly funded by some international financial institutions and a regional financier.
“A technical team working on the operational modalities for the fund has already been constituted and will be communicating the terms and conditions once they have been finalised,” he said.
“What the RBZ needs is an injection of between three and five percent of the deposit base, that translates to at least US$300 million,” said Kwesu, a strategist with MMC Capital.
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