2 September 2012

Zimbabwe: Govt Cautious in Issuing Short Term Securities

GOVERNMENT is proceeding with caution in issuing short-term securities to be used by banks on the inter-bank market to avoid contracting debt meant for recurrent expenditure.

Since the use of multi-currencies, there are no Treasury Bills (TBs)-- short term securities purchased for a price that is less than their face value -- to help in the distribution of liquidity.

As a result, banks have to hold huge amounts in Real Time Gross Settlement (RTGS) balances.

Finance minister, Tendai Biti, told Standardbusiness last week that Treasury was fine-tuning the re-introduction of TBs to avoid contracting unnecessary debt.

"We are going to be cautious and conservative," Biti said, adding: "We are not going to borrow through TBs to support recurrent expenditure. If we are going to issue them, they have to support specific capital projects."

Biti is under pressure from the civil service to increase salaries and there are fears government would borrow to appease civil servants who have threatened to roll out a nationwide strike if their demands are not met.

Biti said Treasury was also mindful of the fact that "one of the things that killed the country is debt and the total absence of fear of contracting debt".

Zimbabwe's total external debt is over US$10 billion and the country has no capacity to settle it.

Biti said the cautious approach was being employed as the coupon (interest) rate would be the defacto prime lending rate. Currently there is no uniformity among banks on the lending rates and they range from 10-35% per annum.

In a research note, a leading brokerage firm, MMC Capital, said the absence of money market instruments had resulted in high interest rates (of as high as 50% per annum) as a result of increased demand for liquidity to finance working capital and other commitments.

It said there was no standard to benchmark interest rates in the market.

The interbank market where banks can trade among each other had become non-existent subsequent to that.

This means that any bank facing liquidity mismatches has to solve the problem on its own as the said institution cannot approach other players because there is no security to be lodged.

This has been compounded by the fact that Reserve Bank of Zimbabwe (RBZ) does not have adequate funding to play its lender of last resort role.

Analysts say the absence of investment instruments on the market had forced banks to hold significant balances either in cash or RTGS accounts.

According to the RBZ, surpluses in the form of idle RTGS balances rose to US$300 million in June from US$120 million in January.

Analysts say the introduction of government securities would lead to the relaxation of fiscal pressures on government as some of its operations could be financed through issuing government securities.

"We thus recommend the government and the central bank to introduce more financial instruments through exploring partnerships with other foreign central banks to back those securities," MMC said.

"However, given the foregoing shortcomings inherent in introducing treasury bills, in our view a better chance exists for longer dated Treasury Bonds than short term TBs because of government's demonstrated constraints in the short term."

In a normal economy, all banks work in unison, making it possible for the financial system in the country to operate efficiently.

Banks with excess liquidity assist those in deficit positions using TBs as security. In addition, the central bank, as lender of last resort, accommodates banks in deficit by offering them overnight funds secured by TBs.

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