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Zimbabwe: A tentative T-Bill step

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AFTER months of soul-searching by both borrower and lenders, Zimbabwe’s Treasury Bill market reopened last week.

Report by Tony Hawkins

It’s a small start – less than $10m – but it’s a significant moment. What does it mean for the country’s finances?

Treasury Bills were a major source of government funding in the final year of hyperinflation which ended early in 2009, when the country abandoned its domestic currency and dollarised.

Inflation, running at billions of percent annually, ended almost overnight and indeed, if the official figures are to be believed, consumer prices have risen a mere 2,4% since December 2008.

This makes Zimbabwe the country with the world’s second lowest inflation rate – after Japan – which seems highly improbable to say the least and suggests that inflation is being seriously under-recorded.

Given Zimbabwe’s bitter experience of reckless monetary expansion degenerating into hyperinflation before dollarisation, it is no surprise that the bureaucracy should be so reluctant to tap the money market.

Indeed some of the strongest resistance to the issue of Treasury Bills comes from Finance ministry officials who fear – with good reason – that with elections looming in 2013, departments will step up demands for increased allocations in the 2013 Budget to be presented on November 15.

Finance minister Tendai Biti says government spending will be limited to some $3,8 billion in 2013 – a fifth of departmental spending bids of some $20 billion. Small wonder then that bureaucrats should be so anxious to keep a tight rein on government borrowing.

That said, the case for carefully managed short-term domestic borrowing is strong. Banks are sitting on some $300 million of cash that they are reluctant – or unable – to lend because of credit quality concerns on the one hand and the central bank’s 30% liquidity ratio on the other. Because, until last week, there was no short-term official borrowing, banks have been forced to hold liquid reserves in cash.

At the same time the government is borrowing offshore and accumulating arrears both at home and abroad. Foreign arrears, accumulated since 1998 now total $6,8 billion or 63% of gross domestic product (GDP), while domestic arrears built up over the last four years of cash budgeting stand at $180 million.

Treasury has wisely set a ceiling of $300 million on domestic short-term borrowing, which looks a long way off given the results of the first successful Treasury Bill tender last week.

The Reserve Bank of Zimbabwe rejected all bids for the first tender for $15 million of one-year paper, but last week accepted bids for $9,85 million of 91-day Treasury Bills at an average borrowing rate of 8,5%.

The tender was for $15 million and actual bids totaled $11,1million, of which $1,2 million were rejected as too expensive.

Commercial bank reluctance to lend to what in effect is a bankrupt government is understandable, which is why authorities need to accelerate negotiations for debt relief. In its recent report on Zimbabwe, the International Monetary Fund described the country as “in debt distress”, with an external debt of $12,5 billion (116% of GDP). It urged Harare to negotiate “an arrears clearance framework” with its international creditors, while refraining from non-concessional offshore borrowing.

In the last two years Zimbabwe has borrowed $850 million from Chinese agencies, mostly for infrastructure projects. This week’s announcement that the fund has lifted its sanctions on Zimbabwe and will extend technical assistance to the country as preparation for a staff monitored programme, possibly starting in 2013, is an important first step in the debt restructuring process.

However, now that the money market is up and limping – rather than running – bankers are likely to increase their lending to the State. After all, 8,5% on short-term paper is a great deal better than leaving funds lying idle.

The return of the money market is a small step forward not least because the Treasury Bill rate sets a market-determined floor for interest rates – which might dissuade politicians from setting statutory maximum lending rates.

Rather than berating banks – especially the multinationals, Barclays, Standard Chartered, Old Mutual and Standard Bank South Africa – for their failure to lend, the government needs to get a grip of its unsustainable deficit and debt problems. The markets will be watching closely to see whether Biti’s Budget on November 15 shows any progress on these two fronts.

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