Zimbabwe’s cash crisis has led to questions about the government’s management of the country’s financial systems, with indications that its increasing borrowings on the domestic market have created a financial black hole for the banking sector and the economy.
The government, with no access to foreign funding, resuscitated the Treasury Bill (TB) market in October 2012. After initially struggling to convince a sceptical market, the TBs have become government’s primary vehicle for fundraising.
Under the TB system, the government issues “promissory notes” to raise money. Worldwide, TBs are popular because, with government backing, they are virtually risk free. But this is only where markets work well.
Analysts say the effect of the TBs avalanche, especially between 2014 and 2015 and the state’s manipulation of the Real Time Gross Settlement (RTGS) is the primary cause of the cash shortage that is presently choking the economy.
In the latest quarterly bulletin, the Ministry of Finance said $245 million worth of TBs were issued in the domestic market during the first three months of the year, reflecting government’s huge appetite for cash. Of this amount, $15,9 million went towards financing the budget deficit while $229,1 million went towards debt repayment and other recurrent spending.
Annually, it projected domestic loan repayments of $678,6 million and a budget deficit of $150 million, result in a financing gap of $828,6 million for the year 2016.
Reserve Bank officials privately estimate the current amount of local debt in the form of TBs at over $4 billion, most of which is attributable to the Finance Ministry through its Public Debt Management Office. The $4 billion gap is equivalent to the size of the entire 2016 national budget.
The central bank’s own schedule showed the growth of its TB securities held by commercial banks from $325,7 million in January last year to $1,126 billion in February this year.
Building societies held $65,6 million from $51,8 million over the same period.
According to analysts, those who are being paid through TBs were simply discounting the securities in the local market and wiring the real money out of the system, a practice which depleted nostro balances.
Zimbabwe’s ability to import cash is now limited because of the depleted nostro positions.
In October 2008, at the height of the hyperinflation era, former Reserve Bank governor Gideon Gono described the RTGS system as “a vehicle for illicit foreign exchange parallel market dealings that have distorted exchange rates beyond the wildest imagination.”
The system had been introduced a few year earlier primarily to stem cash shortages, reduce cheque fraud risks and delays in customer payments.
Analysts say government is the transgressor this time, paying for the maturing TBs and interest payments through the RTGS and starving the market of cash.
But the government’s problem is that the RTGS cannot fund nostro balances or be used to import cash. Under proper banking conditions, the RTGS position simply reflects cash held in vaults by RBZ and the nostro balances in RBZ’s accounts held with external banks. If a bank needs nostro funding, it will request the RBZ to credit its nostro account against a reduction in the bank’s RTGS position
Cash has always been imported from the nostro positions.
It raises the question of how the RTGS position got to where it is now.
One analyst says the TB maturities are being honored at a time when revenue collection is much lower than recurrent expenditure — Q1 figures show a 16 percent disparity between collections and target — and were being met by pushing figures not backed by real cash. This means there is not enough notes and coins to back bank balances, a situation which should not occur in a market that does not print the currency.
Opposition Member of Parliament for Bulawayo South, Eddie Cross, suggests the government is being more Machiavellian.
“In 2015 the RTGS system (money transfers through the banks) handled $45 billion dollars – $170 million a day. This demonstrates the speed at which money circulates in any economy. Now what happens in this system is that when you fill in an RTGS form at your local bank, the bank processes the documentation and sends it, with a wire transfer of funds from YOUR account, to the Reserve Bank.
“In 2015 your money sat there for an average of three days before onwards transfer to your supplier/creditor or other beneficiary. 3 days at $170 million a day – average money in the account at the RBZ $500 million,” he wrote on his blog last week.
“Now I believe that the only credible explanation of the sudden cash shortage is that when (Finance Minister) Chinamasa cannot balance his books at the month end and needs cash, he has been dipping into the RTGS account at the Reserve Bank – replacing the funds with a simple IOU.
“This is patently illegal and puts every bank at risk because, when the commercial bank takes real dollars out of your account for transfer you expect them (you trust them) to deliver at the other end.”
Faced with a cash crunch, the government has sought to bring back a localized currency to create financial mobility in the market in the form of “bond notes.”
It has already successfully done so with bond coins since 2014 which, along with the proposed notes, derive their value comes from a bond facility from the Afreximbank.
In 2014, Afreximbank put up a $50 million bond, a form of a loan, for bond coins introduced to ease the shortage of change in the economy. The planned bond notes are backed by a new $200 million loan, also from Afreximbank.
But a senior banker noted that the bond notes and coins are just a local currency by another name, suggesting their introduction was forced upon the central bank by the political establishment and explains the apex bank’s difficulty in selling their legitimacy to a suspicious market.
Whether by design or accident, Zimbabwe is in the local currency era and it is up to the market to decide whether to accept or reject it, the banker said.
It is worth noting that in February 2009, government only formally introduced the multi-currency era long after the market had rejected the hyperinflation ravaged local unit, the banker added.