Government cuts RBZ borrowing

NDAMU SANDU

Government seeks to restrict lending from the Reserve Bank of Zimbabwe (RBZ) to five percent of previous year’s revenue as it moves to contain fiscal deficits.

Government has been financing its deficit through borrowing from the central bank and at times overshooting the 20 percent limit prescribed by the Reserve Bank Act.

Last year, total lending of RBZ to central government stood at RTGS$3 billion, representing 55 percent of the previous year’s revenue.

In a Memorandum of Economic and Financial Policies that supported the need for an International Monetary Fund’s Staff Monitored Programme (SMP) on Zimbabwe, Harare said RBZ will not increase its net exposure to the government for the duration of the SMP and that it will convert the stock of RBZ lending to the government at end-December 2018 into
marketable debt instruments that the central bank could use for its monetary policy operations.

“…going forward, short-term recourse to the overdraft facility will be permitted only for transient funding mismatches and limited to 5 percent of the previous year’s revenue, with any drawdowns to be fully repaid by the end of each quarter,” government said.
“We will reduce the statutory maximum of RBZ lending to the government through any instrument [overdraft, T-Bills, and other advances] from 20 percent to 5 percent of previous year’s revenue. This will be affected together with any other amendments to the RBZ Act, at an appropriate time.”

Government has been running deficits after failing to eat what it has gathered in revenue. Other than seeking accommodation at RBZ, government has been borrowing from the domestic market through the issuance of Treasury Bills thereby crowding out the private sector.

The Treasury Bills were issued through private placements. This year, government expects to finance the fiscal deficit from commercial banks who are expected to fund 3,5 percent of GDP. The move, government said, is not expected to crowd out lending to the private sector given banks’ excess liquidity and weak demand for credit from the private sector.

Issuance is to be at market interest rates, with auctions of Treasury bills expected to start in the second half of 2019, which will put pressure on the government interest bill.

Non-banks—insurance, pension and asset management firms—are projected to contribute about 0,5 percent of GDP in budget financing in 2019, reflecting in part a doubling of the minimum asset ratios these institutions are required to hold in government securities.

Government said RBZ has intervened aggressively to sterilize the liquidity impact of excessive fiscal deficits, to help contain
inflationary and foreign exchange pressures through issuance of RBZ Savings bonds. The stock of RBZ Savings bonds increased to RTGS$2.7bn at end- 2018 from RTGS$600m in the comparable period in 2017.

“In addition, the RBZ introduced a 5 percent reserve requirement on bank deposits effective from November 2018. Nevertheless, the ability of the RBZ to contain pressures in the goods and FX markets has been hampered by excessive fiscal deficits during 2016–18 financed largely through monetary accommodation,” it said.

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