Whither Treasury bills?

business from the customer’s point of view.
They try to focus on the entire “customer experience” rather than individual transactions.
Hosting an office of this nature is quite splendid, but there are powerful forces tugging in the other direction.
In the banking sector, for instance, customers want low bank charges and high interest rates for their investments and savings while many of the things that banks do to cut costs make the “customer experience” stink. The whole of last month the media was awash with stories on how the floated Treasury bills failed to receive sufficient attention as the quest to revive a money market gathers momentum.
The revival of Treasury bills is a typical market-oriented policy measure, which could have guided financial institutions to manoeuvre on a voluntary basis without monetary authorities resorting to a carrot and stick approach.
The reports went on to indicate that of all the traditional financial institutions headquartered in Harare, only MBCA subscribed to the tune of US$100 000 of the floated bills.
In a nutshell, the launch failed to meet expectations. For starters, a Treasury bill is a financial instrument which the monetary authorities use in order to exert a specific influence on the interest rates and quantity of money through purchase or sale of such financial instruments.
For instance, if the Reserve Bank of Zimbabwe wishes to increase money supply, it buys Government securities on the open market from a broker or an institution such as a bank. If the securities are purchased from a bank, the central bank will normally pay for them by increasing the cash reserves of the bank concerned by means of a book entry.
The bank will now have excess reserves, which it may use to create demand deposits. The opposite procedure is followed when the intention is to decrease the quantity of money. A host of reasons can be attributable to the diminished appetite for the paper, which was introduced in the market few weeks ago.
These range from unattractive features, liquidity crunch, fragile balance sheets for banks, diminished confidence, an undercapitalised central bank and also a staggering debt (both external and domestic).
It is a common fact that Treasury bills by their nature attract a low interest rate as they are less risky instruments to invest in.
However, in an unpredictable investment market like that of Zimbabwe, a substantial risk premium was always to be factored but failure by the authorities to accurately value and factor such a premium saw the rates remaining so depressed that even indigenous banks could not swallow the paper.
With international banks playing a pivotal role in the market due to their higher capital levels and liquid positions, it is almost impossible to see a thriving market where the seven foreign banks in our local market will be remote or passive.
The liquidity crunch coupled with fragile balance sheets for a greater percentage of banks has significantly crippled their appetite to widen their asset portfolios, Barclays Bank for instance has to employ a conservative approach in its lending policy, which resulted in a static-cum-flat interest income. Literally most of the banks do not have funds to transact in Treasury bills as the need to survive has taken precedence over any need to rebuild an active money market. RBZ Governor Dr Gono and Finance Minister Tendai Biti are on record as compelling banks to increase their interest rates and at the same time reduce their bank charges.
A command economy in the financial service sector is not commendable as the cry for economic recovery is at its peak but at the same time the greed and selfishness of financial players has to be brought under control.
The usurious interest rates being quoted in the market are both misleading and damaging thus depreciating the marginal propensity to save by the populace.
With low savings also comes a diminished money supply regime which will render the open market operations irrelevant as money supply will remain stagnantly low.
The undercapitalisation of the central bank is also a dent on the apex bank’s advisory role as a policy formulator.
Central banking is synonymous with confidence and all attempts in the European banking crisis to buy toxic assets by the central banks rests in confidence not the rationality of the policy moves.
With both a non-existent interbank market and lender of last resort, there is an aura that could be invisible within the banking community that reviving a money market is not a solution to their woes.
The dollarised state of the economy has placed the Government into a forced austerity mode as there is no longer space for seignorage, unlike in developed markets were governments could increase government spending in order to spur growth and aggregate demand, the choices of Zimbabwean authorities is quite constricted.
It is time to spruce up the image and perception of the public towards their central bank as the current feeling among the populace is premised on speculation more than facts on the ground.
One in every five Zimbabweans still believes that a central bank is still effective in expediting economic growth with the other four believing that dollarisation has rendered the apex bank irrelevant.
Both external and domestic debts also seem to be crowding out the potential for government to raise funds either offshore or internally.
That inability to attract credit has a direct relationship with the prospects for a vibrant money market as Treasury bills are the primary securities to raise money on behalf of the Government.
The lack of a clear strategy on how to exhaust both the domestic debt (mostly incurred by the central bank before dollarisation) and the external debt of above US$9 billion has to be significantly addressed before the prospects of having a vibrant and active money market are entertained.
The earlier the better because as a nation we realise that there will be economic growth and development as long as the greenback and the South African rands are the primary medium of exchange.
To expect a vibrant money market where the central banking will play a pivotal role in setting the monetary policy direction is quite ambitious.
The economy has to grow at an average of 12 percent consistently over a five-year period with foreign direct investment exceeding US$4 billion per annum for the nation to prepare groundwork for the return of its currency. Even crafting a Treasury bill with interest rate features which are attractive to reach 12,5 percent will certainly not make it a common paper on the Zimbabwean market.
It is significant to address the monetary conditions as a precursor to a well-defined money market.

Christopher Takunda Mugaga is an economist. He also works at Econometer Global Capital, a regional finance and economics research firm where he is the head of research. He can be contacted on 0772 340 353/0776 266 062 or [email protected]