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Uncertainty clouds TB market

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THE African Development Bank (AfDB) says uncertainty surrounding the holding of elections in 2013 and the ability by the government to pay at maturity may have caused the lack of enthusiasm on the part of some banks in participating in the Treasury bills (TB) market.

THE African Development Bank (AfDB) says uncertainty surrounding the holding of elections in 2013 and the ability by the government to pay at maturity may have caused the lack of enthusiasm on the part of some banks in participating in the Treasury bills (TB) market.

Report By Mernat Mafirakurewa Acting Business EDITOR

In its November monthly economic report on Zimbabwe, the regional lender said other challenges in the TB market related to the restriction of participation to commercial banks when there were other institutions that possibly have money and could participate.

It cited insurance companies, pension and mutual funds as other possible players on the TB market.

“In addition, opening TBs to a wider range of institutions would reflect whether lack of participation is due to lack of funds to buy TBs or is a reflection of other underlying challenges in the economy,” the AfDB said.

“Commercial banks currently seem not to consider TBs a low-risk instrument. This is against the background of the prevailing low credit worthiness of the government and the Reserve Bank of Zimbabwe (RBZ)’s inability to print money in the multicurrency system.”

The AfDB said there were some commercial banks that were of the view that there was a possibility of the government rolling over the TBs at maturity.

“With cash-budgeting in place, it is likely that in future, funds may not be available to honour maturing TBs. The government still faces limited fiscal space and banks may be adopting a wait-and-see attitude. The government is operating with huge debt levels (domestic and foreign).”

The bank noted that weak revenue generating capacity of government, against growing needs for funding created scepticism about the potential of central government to honour the TBs at maturity.

It said the under-capitalisation of the RBZ further suggested the institution may not assist the government to honour TBs in the event it failed to do so.

“Most banks are not prepared to buy TBs on an experimental basis. They would not want to lock funds in TBs that may be affected by other unfavourable developments in the economy,” said the regional lender.

In reaction to the low participation in TB auctions, Finance minister Tendai Biti has since indicated that the government would be issuing Negotiable Certificates of Deposit to the banks.

This would constitute a compulsory purchase of the TBs in future.

Under normal circumstances, banks should see the business case of buying the TBs as an investment and security instrument, without pressure from the government.

AfDB said the current situation reflected anomalies in the banking industry and the economy in general.

It said the poor performance of the TB auctions suggested the need to address the divergent views on the interest rate levels and the need to install confidence in the system.