The Reserve Bank has announced that it is borrowing $60 million from the domestic market to finance its programmes in a third auction system which is market-oriented.
The auction comes after government abandoned the private placement system which has been in use over the years. It also reflects government’s growing appetite for the debt instrument.
Before that the apex bank borrowed $15 million and $30 million respectively. With interest at 50 percent, local financial institutions have taken a conservative lending approach and are now driving income through non-interest income and government paper such as Treasury Bills.
Offer for the 365-day $60 million Treasury Bills opened on Monday and closes on Thursday. Allotment and payment will be done on Thursday.
The commercial paper enjoys prescribed asset and liquid asset status, is tradable and enjoys tax exemption. It is acceptable as collateral for overnight accommodation by the central bank and allotment will be at weighted average rate.
Government could also be borrowing to mop up excess liquidity in the market while at the same time improving the process of price discovery.
However two issues make the issuance of Treasury Bills worrisome. Firstly, lack of full disclosures on what the debt instruments are being used for suffice to say “government programmes”.
Unlike Agricultural Marketing Authority bills in which government divulges purpose (e.g. buying grain) of the debt instrument, the government is not providing adequate disclosure on Treasury Bills.
For a government that has been hyping its exploits in fiscal consolidation, an excessive issuance of the debt instrument could choke government in the long term as domestic debt spirals out of control.
The timing of the debt instruments also comes against the backdrop of pressure from a restless civil service which is pushing for better wages.
Secondly, the issuance of the treasury bills will crowd out private sector lending at a time many companies are on their knees.
Government has also been borrowing from the central bank and breaching the prescribed central bank overdraft limit by several billions to fund its operations. Last year, the overdraft was ZWL$3 billion which was 55 percent of the previous year’s government revenue in violation of Section 11 (1) of the Reserve Bank Act (Chapter 22:15) which states that borrowing from the central bank should not exceed 20 percent of the previous year’s government revenues at any given point.