"The root cause of excess demand for forex, on the other hand, is emanating mainly from increases in money supply as a result of greater spending by Government, money creation – loans and overdrafts – by banks” said RBZ Governor John Mangudya in his Mid-Year Monetary Policy Review.
Financial Matters
This is a strong statement by the RBZ chief which highlights serious structural challenges in the economy. Increased Government expenditure which is being financed mainly from treasury bills issuances and overdrafts has become an albatross to the banking sector stability. Banks face a threatening dilemma of whether to hold TBs or just keep money on the RTGS platform given nostro challenges, risks in lending to the private sector and cash shortages. TBs and RTGS balances may be viewed as carrying the same risk since the exposure is to one entity, Government. Whether banks leave their balances on RTGS - earning nothing, or hold TBs earning a stipulated interest, exposure is to the same institution. In the banking sector, indigenous banks have been aggressively buying TBs in the secondary market. For instance, the country’s largest bank CBZ bank TBs holdings were $828 million as at June 2017 and ZB $117 million. On the contrary, foreign banks have been more cautious on Government issued paper preferring to leave their balances on the RTGS platform. MBCA bank for instance has only $9 million in Government issued TBs, excluding Afreximbank Trade Backed Securities, whilst having a swelling $122 million in RTGS balances. The same can be noted for other international banks.
Sentiments in the sector are that Government issued TBs are considered risky due to Government’s overrun expenditures. This is contrary to global standards were Government issued paper is considered risk free. The pertinent question here is, “what’s wrong with our Government to receive such a perception?” Lack of reforms in Government both on policy and expenditure has seen the market become more sceptical. Given high risks in the private sector, treasury paper should be a more preferable investment option. On the other hand, Government’s borrowings through RBZ overdrafts also puts RTGS balances at risk and at the same time instantaneously increases the level of money supply in the economy. This puts serious imbalances in the market and to some extent promoting the existence of the parallel market. The RBZ acknowledged the negative effects of TBs especially on money supply and economic balance and advised the Government to implement measures to support fiscal discipline. Mangudya said, “it is critical, going forward, that an equilibrium position of a sustainable fiscal deficit is ascertained to ensure that TBs do not crowd out foreign exchange in the market.” He further explained that, “bringing equilibrium or rebalancing the economy therefore requires action to increase the export of goods and services whilst simultaneously reducing fiscal deficit to sustainable levels and executing structural reforms that increase investor confidence and transform the state owned enterprises”. This is critical for the economy as these measures deal with the confidence deficit which is also a major source of gross market indiscipline, rent seeking behaviour, corruption, illicit flows, side marketing within the national economy.
However, fiscal reforms especially that curtails expenditure may take time to be implemented. Although TBs issuances may be capped, the Government will use the overdraft facility to finance its bloated expenditures. Risk of such behaviour is that it instantaneously increases the level of money supply. It is indeed a form of money printing which might be inflationary given production bottlenecks. In the absence of clearance of external debt arrears, external injections will remain subdued and the Government will continue to borrow from the domestic market for its expenditure financing. Pressures of election financing with some sources estimating it at $250 million and populist spending as the norm towards elections, entails that the Government will continue to incur a huge budget deficit. This is a source of concern as the economy is in a similar quagmire as in the hyperinflation era where fiscal indiscipline led to record level money printing which led to record level inflation and eventually the demise of the local currency.
