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Morris Mpala, MoB Capital Ltd
Definition
Economists have defined Treasury Bills as “a short dated government security, yielding no interest but issued at a discount on its redemption price”. Always issued at discount to par.
Zimbabwean Scenario
Treasury bills (TBs) are Government borrowings from the local market. These have tenure of 91 days to at times 2 -3 years. And these use an open market operations (OMO) auction system where bids are entertained and offers made.
Individuals, companies can “buy” these from the Reserve Bank of Zimbabwe (RBZ) tender or buy them on the secondary market at discounted rates. It is a negotiable instrument from one party to the next.
During recent times the Government has been issuing Treasury Bills to its creditors through RBZ to cover its financial obligations and at times to raise money to meet its day to day financial obligations not necessarily capital expenditure like infrastructural development. RBZ and Government have been paying its creditors using TBs.
Government debt, RBZ assumed debts, strategic debts, Non performing bank loans through Zimbabwe Asset Management Company (ZAMCO), private company bank balances have been issued with (converted to) TBs as a promise to pay in future with interest.
These financial instruments have due dates (can be rolled over on due date) and are issued by RBZ but guaranteed by Government. From a layman’s point of view the Government is everything, thus, ultimately it is the Government doing all but being regulated by the central bank as the custodian on monetary policies.
Advantages of issuing TBs
It provides Government with liquidity, allows Government to restructure debt from short term to long term. It aides debt management and default on TBs is minimal thus it is kind of secure to the lender though performance could be delayed. It is legal to issue TBs and commercially viable due to its cost effectiveness.
Generally TBs are considered risky free and liquid.
You can discount TBs on the open market before due date. Generally TBs are secure compared to other debt instruments due to Government backing the assumption being Government does (eventually) settle its debt even in difficult times as it is guaranteed as a going concern. TBs are a very negotiable instrument.
These are very simple money market instruments relative to other money market instruments. You can use TBs as security/collateral to borrow from the interbank market or from banks directly as an individual.
Disadvantages of Issuing out TBs
To the lender rollovers can be a source of headaches on the due date. Government overcrowds local players that needs to borrow thus starves market of much needed capital. Socially in Zimbabwe TBs are not popular any more. None settling of TBs debts dents trust and confidence on the financial markets.
Not ideal investments for small individual investors.
They do not pay interest prior to maturity.
Current TBs situation: The Hullaballoo
The value of TBs has grown significantly against the Gross Domestic Product (GDP) and that financially is not healthy. Due to the increased ratios of rollovers, it has created a liquidity challenge due to capital gridlock. TBs are being viewed as paper money or book entries and very illiquid.
Misconception on TBs has given perfection risks to the uptake as well as their use. For example TBs risk profile has gone up against other debt instruments.
Over reliance on TBs and if not handled adequately reduces Government credit worthiness thus increases country risk.
Way forward
It goes without saying that production, production; production is needed so that treasury receives more in its coffers to service Government obligations. It is no brainer as well to reduce expenditure and probably implement eat-what-you-kill mantra to derive excesses that retire Government debt as it falls due. Finances permitting do buy backs of TBs (early debt retirement) to improve local market liquidity. We need to minimise the rollovers to provide liquidity to owners of capital thus improve liquidity.
There is a need for over scrutiny and proper planning on Government debt in line with international good corporate governance policies. Minimise issuance of TBs being guided by local Gross Domestic Product (GDP) to avoid Government overcrowding other local borrowers on the local market.
This reduces over indebtedness and frees liquidity to capital expenditure as opposed to recurrent expenditure and could stimulate growth all things being equal. Where security is provided, RBZ should liquidate to provide liquidity and where Government/RBZ is owed it should go ahead and aggressively pursue performance of their debts.
Rationalisation of Government expenditure is chief among this. Commercialisation of parastatals is overdue. Ease of doing business is key to allow inflows into Treasury.
Widening tax base (not punitive taxes though) of SMEs through formalisation and an innovative tax friendly regime. Above all, we need to create a conducive environment with minimum levels of commercial shenanigans and incentivise tax compliance as opposed to bleeding the few complying parties.
In all this the autonomy of RBZ should be encouraged, guarded jealousy in a smart and aggressive manner so as to give research and recommendations on Government debt and its monitoring to keep it in check at all times.
RBZ needs capacitating to revisit interbank market concept to alleviate liquidity on the market and probably could reduce TBs towards ZAMCO.
I hope this explains the noise on TBs and a better understanding of this infamous money market debt instrument.
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Morris Mpala is the managing director of MoB Capital Limited, a Bulawayo-headquartered micro-finance institution with footprint across the country.
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