The government’s hidden hand in Zimbabwe’s cash crisis

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 market has become government’s primary vehicle for fundraising.

Under the TB system, the government issues “promissory notes” to raise money. The buyer of the bill expects a profit by redeeming the bill for less than what they paid for it. 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.

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