Treasury Bills downside

HARARE - The African Development Bank (AfDB) says the country risks engaging in excessive borrowing and the possibility of rollovers in the event that it fails to redeem its Treasury Bills (TBs).

The TB market, which last operated in 2008 was reintroduced last month in a bid to raise funds to enable government to smoothen its revenue and expenditure streams under the current cash budgeting systems.

Its re-establishment was also meant to assist in reactivating the interbank market, money market and benchmarking the pricing of other financial securities.

The tender conducted early last month was worth $15 million but was restricted to financial institutions on Real Time Gross Settlement (RTGS).

The minimum tender was $100 000 and institutions were limited to one tender.

The characteristics of the TBs included the 91-day maturity tenor and no option of a buy back.

“In terms of outcomes, all the bids (amounting to$7,7 million) were rejected.

The tenders had interest rates ranging 5-15 percent. Most banks quoted rates above 10 percent.

The TBs were undersubscribed by $7,3 million. Most big banks did not participate in the tender, suggesting a number of issues that require Government attention,” the AfDB report noted.

The regional bank said that although most of the big banks cited having interests in investing in alternatives such as financing agriculture, there could be other challenges associated with this lack of participation.

These include scepticism around government’s ability to honour the TBs at maturity, absence of a buy-back feature of the TBs and less need for additional collateral security instruments for borrowing in the interbank market by big banks that still lend and borrow bilaterally among themselves.

“It seems that the issue of collateral security that the TBs would have served does not seem crucial for the big banks, most of which are sitting on idle funds as shown in Zimbabwe Electronic Transfer Settlement System (ZETSS),” said the AfDB.

The report said unfavourable outcome of the first TB auction has implications and is also reflective of some challenges in the economy.

Contrary to the views of authorities that the outcome suggested that most banks think the risk level of TBs is not low against the background of tight budget constraints and the uncertain political and economic environment.

“The RBZ rejected all the tenders largely on the basis that the interest rates quoted by banks were too high and inconsistent with the low risk associated with TBs. It seems that banks do not share a similar view relating to the low risk associated with TBs,” noted the report.

Tomorrow the Reserve Bank of Zimbabwe is set to auction $30 million TBs in a move that would result in more liquid instruments being used in interbank placements.

Although the use of money raised through TBs is highly anticipated to fund capital projects, the market is awash with speculation that the money can be diverted to cushion civil servants’ paltry salaries and also fund recurrent expenditure.

Finance minister Tendai Biti has indicated that revenue generation is unable to meet the country’s growing financial needs.

In his Mid-Term Fiscal Policy review, Biti slashed the 2012 budget to US$3,4 billion from US$4 billion attributing this to the underperformance of the diamond revenue, among others.

In a normal economy, all banks work in harmony, 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.

Before the return of the TBs, any bank facing liquidity mismatches had to solve the problem alone as the troubled institution would be unable to approach other players due to the absence of security.

Treasury Bills downsideRBZ reintroduced Treasury Bills last month in a bid to raise funds to enable government to smoothen its revenue and expenditure streams under the current cash budgeting systems. - Kudzai Chawafambira

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