Treasury to reduce TB issuance

HARARE - Finance minister Patrick Chinamasa says government will next year undertake a restructuring exercise aimed at curbing the issuance of Treasury Bills (TBs) and prevent the sovereign paper from becoming a “surrogate currency.”

A TB is a short-term debt obligation backed by a government with a given maturity, in most countries the promissory notes are issued with a maturity of less than one year.

Issued through a country’s central bank, TBs commonly pay no explicit interest but are sold at a discount, their yield being the difference between the purchase price and the par-value (also called redemption value).

The Treasury chief last week said in 2016, the country had recorded an unsustainable financing gap of $1,1 billion with projected total revenues of $3,5 billion, against anticipated expenditures of $4,5 billion which saw TB issuance increase.

“...in this regard, the fiscal framework for the 2017 Budget discourages the expectation and perceptions that TB issuances are now a form of surrogate currency to settle government expenditure, as doing so would only pose challenges of capacity for government to repay on such obligations,” the minister said.

He said the mismatch between revenues and expenditures required that the thrust of government for the 2017 Budget rationalises expenditures in line with sustainable financing capacity.

“The target would be to create scope for the budget to also adequately finance ZimAsset development programmes and social services, while at the same time implementing structural measures to enhance production across the economy’s various sectors in order to grow revenues,”  he added.

The original 2016 national Budget target was a more manageable deficit of $150 million, representing one percent of GDP and a financing gap of $1,1 billion represents growth from three of GDP for 2015 to an unsustainable eight percent of GDP.

However, the fiscal framework of revenue collection amounting to $3,7 billion and projected expenditure of $4,1 billion presents a financing gap of about $400 million, which is 2,7 percent of GDP, for the proposed 2017 Budget.

This comes as equities firm, IH Securities, recently warned that Zimbabwe’s financial sector — which has been faring well in recent years — faces an uncertain future on the back of doubts in market around central bank-issued TBs.

“…it appears that due to lack of capacity to service there were some ‘roll-overs’ in July which in our view may affect discount rates on these instruments going forward,” IH cautioned.

To cope with tight liquidity and meet obligations, the Reserve Bank of Zimbabwe (RBZ) has been issuing TBs to its various creditors.

Reports indicate that the central bank has since minimised the issuance of the paper with shorter maturities while coupons on fresh issues has been suspended.

According to another local financial market firm, Equity Axis (EA), accumulated debt has gradually grown to levels where government cannot sustainably issue more paper with similar features which requires it to commit in the short-term.

AE recently pointed out that deferring all obligations in periods of up to three years gave relief to fiscal space in a period where government collections were underperforming, after Zimbabwe Revenue Authority missed if first half collection target by six percent.

Since 2009 aggregate TBs holdings as a percentage of deposits as reported by the central bank grew from zero percent to 29 percent as at June 2016.

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