19 October 2017

Zimbabwe: 'Govt Could Default TBs Payment'

Photo: New Zimbabwe
President Robert Mugabe cartoon.

The Parliamentary Budget Office has warned that the Government could default on its Treasury Bills payment obligations on maturity, a development it fears could leave most local commercial banks, which hold the bulk of the TBs stock heavily exposed. The Government has been heavily relying on domestic markets to finance budget deficit.

Currently, TBs worth $2,5 billion have been issued to the market. The bulk of the TBs were used for expunging the central bank's legacy debt of $826,8 million, about $262 capitalised State entities and over $843 million financed Government programmes, including drought and recurrent expenditures while bills worth $568 million were issued for the Zimbabwe Asset Management Company debts assumption activities. In its second quarter performance review of the budget, the Parliamentary Budget Office noted that at the current level, the TBs held by commercial banks were now "unsustainably" 1,7 times the level of bank equity capital, 1,3 times at the end of 2016.

"The TBs are creating more fictitious money than what is necessary. With commercial banks becoming increasingly fearful, and rightfully so, about the potential for TBs default, banks have smartly preferred to hold onto physical US dollar, limiting withdraws and international card transactions," said the report.

"The TBs face further potential mark downs with the new accounting procedures under the International Financial Reporting Standards 9 rules that will take effect on January 1 next year," it added. However, some analysts have dismissed the possibility of the Government defaulting saying instead, the holders of the Government paper should worry about the potential loss of value in the face of rising inflation. "A false and indeed misleading opinion regarding the increasing possibility of Government defaulting on its TBs obligations has been gaining traction in the market," economist Brains Muchemwa said.

"The purveyors of such an opinion fail or refuse to acknowledge the ability of the Government to print money on the RTGS platform, itself the source of RBZ credit to Government. In any case, the excessive monetary expansion that has triggered the huge imbalance between the RTGS balances and nostro balances indeed confirm the unfettered ability of the Government to print money notwithstanding perceived technical impossibilities imposed by the dollarised environment. Therefore to imagine, and let alone worry of impeding default on the TBs issued by the Government is being unnecessarily alarmist."

The PBO said the current level of public debt violated provisions of the Debt Management Act, which provides that outstanding Government debt as a ratio of GDP should not exceed 70 percent at the end of any fiscal year, but is now over 80 percent. An analyst with a local bank said the Government had moved electronic printing of money through RTGS, thus putting pressure on the foreign currency available.

"The recent exchange controls put in place recently will push up premiums thus when government wants to import it will be forced to fork out more to source the foreign currency," said the analyst. Central bank governor Dr John Mangudya said despite the developmental aspect to the TBs, the Government would in future be more conservative in issuing the instruments.

"It is critical, going forward, that an equilibrium position of a sustainable fiscal deficit is ascertained to ensure that TBs do not crowd out foreign exchange in the market," he said. The average rate for one year TBs is 8 percent, 12 percent for two years and between 20 and 25 percent for three years. Most of the trades are a 3-year time horizon. Financial analysts now require a situation where the central bank could actually come into the market issuing the paper where players all bid for the financial instrument.

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