IMF warns Zimbabwe on issuance of Treasury Bills

FILE PHOTO: The International Monetary Fund (IMF) headquarters building is seen in Washington, U.S., April 8, 2019. REUTERS/Yuri Gripas
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The International Monetary Fund (IMF) has warned the Zimbabwe government over the excessive issuance of the government commercial paper into the market to finance its activities, a move likely to trigger inflation, Business Times can report.

The issuance of government commercial paper comes after Finance Minister Mthuli Ncube recently said the government would limit the issuance of Treasury Bills (TBs) and bonds to ensure macro-economic stability.

In stable economies, TBs are one of the safest and go-to investment destinations as they are generally considered risk-free and liquid due to their backing by governments. However, the commercial paper issued by the Zimbabwe government, had previously become the source of economic vulnerabilities.

“Domestically, the government’s ability to finance itself by issuing bonds or borrowing from the banking system is very constrained given the monetary and exchange rate framework that the country has a susceptibility to inflation,”  IMF  African Department director Abebe Aemro Selassie said a virtual meeting for regional economic outlook for sub-Saharan Africa.

Zimbabwe has resorted to borrowing from the domestic market to plug the gap as revenue generated is not enough to meeting the country’s growing demand. In addition, Zimbabwe cannot borrow from international financial institution due to the debt overhang which has blocked access to cheap financing required to reboot the economy devastated by the Covid-19 pandemic.

Since December, the government has been in the market seeking to raise more than ZWL$1bn through the issuance of TBs to its programmes and cashflow management.

But, the IMF believes that the continued issuance of the government paper would push inflation and undermine growth prospects.

Government has been bullish about the outlook, projecting the economy to grow by 7.4% this year buoyed by a stellar 2020/2021 summer cropping season.

But, the IMF believes the Covid-19 implications and limited financing would slow down the economy.

“On growth, an important reason why we are more conservative in our growth projections is, of course, unfortunately, Zimbabwe continues to have very limited access to external concessional support.

“So, we feel that with the limited fiscal support, with the toll of the pandemic on economies, on peoples’ lives, livelihoods, we feel that the robust, growth recovery this year will be constrained to the order of 3%,” Selassie said.

Efforts to get a comment from the Finance and Economic Development permanent secretary George Guvamatanga were futile. He had not responded to questions sent to him by the time of going to print.

Recently, Guvamatanga said the government was managing the issuance of commercial paper unlike in the past when it had become a de facto currency.

Although the government has committed to maintaining a high level of fiscal discipline, the Treasury has resorted to issuing TBs in a bid to raise funding to support key development operations amid concerns of lack of external credit support to meet Zimbabwe’s budgetary needs.

In his Monetary Policy Statement, RBZ governor John Mangudya said the central bank has escalated its open market operations from October 2020 by aggressively mopping up excess liquidity through the issuance of short-term open market operations (OMO) savings bonds at 5% per annum interest in line with its conservative monetary targeting framework,.

As at December 31 2020, the outstanding OMO savings bonds stood at ZW$14.1bn representing significant amounts of sterilised excess liquidity.

Mangudya said keeping reserve money growth under check and the improved efficiency in the allocation of foreign currency through the foreign exchange auction system have kept inflation on a downward trajectory since the second half of 2020. – Business Times