Taurai Mangudhla
HARARE – The Reserve Bank of Zimbabwe is in a precarious situation as the value of local bond notes and transfer rates against major currencies hit new lows after the apex bank issued more Treasury Bills running into hundreds of millions in the first half of 2018 with more expected into the year.
Appetite for TBs has been waning as government now depends on the instruments to fund its programmes. This has attracted huge premiums as high as 70 percent on the market as low export earnings continue to hit the economy.
It has also emerged that the stability and fate of billions worth of TBs issued in recent years is under threat as revenue collector Zimra is said to have been garnishing accounts of mostly asset managers to collect taxes on TB transactions.
Zimra, through its corporate communications department, confirmed it garnished accounts of asset managers, saying it derives its power to garnish any defaulting clients account from the Revenue Authority Act, Income Tax Act, Value Added Tax Act, Customs and Excise Act and Capital Gains Tax Act among other legislation.
The revenue collector said the Acts give Zimra the legal backing in carrying out its duties and reason for excising those powers.
“Where there are any taxes due which remain unpaid, Zimra is empowered in terms of the law to utilise a number of recovery measures, including appointing agents (commonly known as garnishees). Interest on Treasury Bills is therefore not exempt from being garnished as a last resort to enforce compliance amongst truant taxpayers,” said the revenue collector.
Asset managers who spoke to the Business Times on condition of anonymity said there are ongoing discussions between them, under industry umbrella body Association of Investment Managers Zimbabwe, and Zimra to iron out sticking issues.
“There is a conflict between provisions of the debt assumption Act and the tax law. The Debt Assumption Act says no tax, duty or other duty or fee shall be payable under the Act basically exempting TBs from tax, but Zimra has a different interpretation,” said a top asset manager.
“The idea is to have one interpretation and I can confirm that the engagement is positive,” he added.
Another asset manager said questions where around treatment of farmers who are ideally not supposed to be taxed as well as withholding tax in the case of transactions with entities that have no tax clearance.
“With TBs you are basically dealing with proper entities so the withholding tax question is not much of an issue. There is just a small conflict which is being ironed out. So far we don’t know of any of our members whose accounts have been garnished. It hasn’t come to that and we expect a favorable result, judging by the progress of meetings which we have held with Zimra so far.”
All this spells doom for the trade-able paper which is already heavily discounted. This is also potentially disastrous to the stability of the financial services sector as banks’ core capital includes a significant stock of TBs.
Well-placed sources say $400 million worth of TBs had been issued by May this year. Fears remain close to $1 billion will soon be pushed into the market, with the Zisco Steel $500 million debt assumption being one of the single major drivers, effectively increasing money supply and resulting in asset price inflation.
President Emmerson Mnangagwa late May assented to the Zimbabwe Iron and Steel (Debt Assumption) Bill, enabling Government to take over $494,8 million owed to the company’s local and foreign creditors.
The value of usable dollars keeps declining
This could further hit the value of local dollars, officially at par with the United States dollar.
Although the Reserve Bank of Zimbabwe (RBZ) insists RTGS balances and bond notes are at par with the US dollar, reality on the ground speaks otherwise with premiums of up to 70 percent now being charged on electronic modes of payment-Zipit, RTGS and mobile money- while more than 30 percent is charged for bond notes.
Confidence is low with diaspora remittances and FDI plunging. Cash is being wiped out of formal banking amid indications Zimbabwean banks last year imported about $700 million for cash withdrawals all of which has disappeared from the formal banking channels in apparent show of lack of confidence.
Top banking experts who spoke to Business Times say issuance of Treasury Bills (TBs) also further dents confidence in the market given that it has proven to be difficult to extract the value of TB issuances from the RBZ.
“The impact of the issuances is that money supply will continue to increase especially as RBZ will have to print more RTGS dollars to honour the T-bonds on maturity,” said a source who requested not to be named.
“When that happens, it causes asset price inflation, including pushing up equities, properties as well as the parallel rate for USD,” added another expert.
Fears of forced heavy discounts on TBs are rife amid debate of the inevitable official return of a local currency. Experts argue the TBs are the local currency which, at some point, will take a huge knock on official conversion against the US dollar.
Currently, a 70 percent premium is charged on RTGs for US dollars on the parallel market.
Already, the central bank is feeling the heat and keeping information about the 2018 stock of TBs a closely guarded secret. RBZ deputy governor Kupukile Mlambo dodged questions around the stock of TBs issued this year and projections at an Actuarial Society of Zimbabwe (ASZ) convention in the capital.
The convention raised concern over continued issuing of TBs and in particular the Zisco debt Assumption.
“In the context the RBZ debts, they were long term not three months, we should call them bond because they are long term. The ones you need to worry about are the ones we have been borrowing to pay current expenditure,” Mlambo said.
“Of those, up top now we have been able to pay when they are due because we understand that if you don’t pay when they are due you harm the confidence which means you have to borrow at a much higher rate.
“So we have done everything to ensure that when they are due we pay them on time, but there are some that can be negotiated longer. As far as I know, all of them are paid,” Mlambo added.
Mlambo said a lot of TBs are sitting with banks, accounting for a significant portion of their liquidity and paid on maturity.
This year, Mlambo said, the central bank has not issued a lot of TBs compared to last year when there were “other programs.”
Mlambo said the cause of the parallel market is the difference between the local US dollar, that is the RTGS not so much the bond notes, and the actual US dollar.
Figures at hand show that the central bank in 2017 issued TBs worth $2 billion to push their stock to $5,2 billion, up from $3,2 billion in 2016. TBs have been issued to close perennial budget overruns, clear legacy debt and resuscitate ailing State enterprises.
However, a top Ministry of Finance official said Government had been making tangible reforms aimed at stabilising the economy including minimising issuance of TBs, reducing recurrent expenditure and clearing its arrears with IFIs.
Efforts to get an official comment from central bank chief John Mangudya were fruitless at the time of going to print.
