Cash strapped Zimbabwean government’s efforts to raise ZWL$ 500 million through a Treasury Bill (TBs) auction recently drew a lukewarm response from private sector, with total bids limited to just ZWL$ 170 million as investor appetite in the government paper continues to diminish.
Government has in the past year relied heavily on TBs issuance to raise funds for its various expenditure and the auctions have been oversubscribed by local investors.
However, due to inflationary developments and the fast depreciation of the local currency, most investors have not yielded desired returns.
The latest issue was to raise ZWL$ 500 million from local financial institutions towards financing of Covid-19 expenditure at a time Covid-19 positive cases in the country have been on the rise in recent weeks.
Last week Friday, the Central Bank issued 360 and 270- day TBs worth a cumulative ZWL$ 500 million with the 360 day paper failing to attract suitors.
The average interest rate for the paper stood at 19.14 percent for 270-day paper, a rate analysts say was unattractive given the inflationary environment.
“If you look at what the Reserve Bank wants, the current interest rate for the Treasury Bill is too low in line with borrowing rates of 20 percent and 35 percent. So the TBs interest rates are low which make the government paper very unattractive. This is if you take into account the high levels of inflation rate so the real returns does not adequately compensate for the risks,” economic analyst, Persistence Gwanyanya said in an interview.
Inflation rate is hovering around the 1000 percent mark and the fixed interest rate on the government paper makes it too risky for investors given the market volatility.
Alternatively, most businesses in the market are opting to invest in the American dollar (USD) to hedge against inflation rather than the government paper.
According to Zimbabwe Economic Policy Analysis and Research Unit (ZEPARU) economic barometer for May 2020, the loan to deposit ratio in the financial sector stood at just 30 percent against a benchmark of 70 percent, meaning the country’s banking sector has capacity to increase credit for economic expansion and growth.
Yet this has not been the case.
“There is a lot happening on the market so investing in the currency will be much attractive than in the government paper. If you look at the loan to deposit ratio is less than 30 percent so it means there are significant deposits which are not being utilized towards production use,” Gwanyanya noted.
Already, Zimbabwe is struggling to access external funding from international financiers due to its debt distress status.
Zimbabwe’s credit lines are hence limited to the domestic market.
However, following the introduction of the Foreign Currency Auction Trading System, market watchers are calling on government to introduce exchange rate linked securities which are attractive enough to unlock domestic deposits in local banks.