Tawanda Musarurwa, Harare Bureau
ZIMBABWE’S monetary authorities should consider issuing a long maturity United States dollar Brady type Bond that can help in preserving the value of Real Time Gross Settlement (RTGS) balances, Professor Ashok Chakravarti has said.
The ballooning of RTGS balances in the past was largely driven by increased Government financing through the overdraft at the Reserve Bank of Zimbabwe (RBZ) and the issuance of Treasury Bills.
“Such financing mechanisms are crowding out the private sector hence constraining production. This also increased money supply in the economy translating into exchange rate misalignment and inflationary pressures . . .” acknowledged Finance and Economic Development Minister, Professor Mthuli Ncube as he announced his “Fiscal Measures for Reversing Fiscal Dis-equilibrium”.
Government has moved to pull back on the expansionary fiscal stance but there remain concerns over the still high levels of money supply on the market.
Latest official figures from the Central Bank show that bank deposits currently sit at circa $10 billion.
And although the RBZ has put in place a number of measures to preserve the value of RTGS balances (including fiscal consolidation; improvement in fiscal revenue collections; reduction of recourse to the central bank overdraft; liquidity management through statutory reserves and savings bonds, and encouraging market discipline), the University of Zimbabwe economics professor suggests more needs to be done.
“To prevent the value of RTGS balances depreciating excessively, a long maturity United States dollar Brady-type Bond can be created. This bond can be exchanged for a certain proportion of the TB’s held by the banking system at 1:1. The banks can then allocate these to deposit holders who wish to extinguish a part of their RTGS balances,” he said.
“The new bond will have to be supported by collateral, otherwise there is no difference between it and any other Government debt instrument. For this purpose, a sinking fund can be created and invested in zero coupon US dollar STRIPS.
“Current price of 30 year STRIPS maturing in 2048 is 36.27, that is, $1 billion worth of this bond can be collateralised by purchasing 360 million worth of STRIPS today. A three percent tax should be levied on the forex auction platform. This will generate $100 million a year to fund the sinking fund.”
Prof Chakravati added that the Bond should be fully tradable within Zimbabwe.
Typical risks that investors face with Brady Bonds are interest rate risk, sovereign risk, and credit risk. With the Bond only tradable locally, the issue of sovereign risk falls away.
What is a Brady Bond?
According to Investopedia, Brady bonds are bonds that are issued by the governments of developing countries.
Brady bonds are some of the most liquid emerging market securities.
The bonds are named after former US Treasury Secretary Nicholas Brady, who sponsored the effort to restructure emerging market debt. Most issuers tend to be Latin American countries.
“The idea behind the bonds was to allow commercial banks to exchange their claims on developing countries into tradable instruments, allowing them to get non-performing debt off their balance sheets and replacing it with a bond issued by the same creditor.
“Since the bank exchanges a non-performing loan for a performing bond, the debtor government’s liability becomes the payment on the bond, rather than the bank loan. This reduced the concentration risk to these banks,” says Investopedia.
Analysts say the rising money supply coupled with foreign currency shortages has seen a surge in inflationary pressures.
Latest figures from the Zimbabwe National Statistics Agency, the country’s inflation rate for the month of October increased to 20,9 percent from 5,4 percent in the previous month.
Economists say the management of money supply is thus very important to manage liquidity and price level. Financial expert, Mr Joseph Mverecha, says excess liquidity has negative consequences on the functioning of the economy.
“The economy requires liquidity to function properly. Liquidity is to the economy what oil is to the engine of a vehicle. But just as too much oil is not good for a car, too much liquidity is not good for the economy.
“Liquidity by itself does not create value, but assigns a value to output. Production, though aided by liquidity, is really a function of supply side factors — our investment in capital, technology, labour and of course also availability of foreign exchange. These are the key determinants of production, output and value addition,” he said.
“Too much liquidity often translates into asset price bubbles, with visceral effects on the economy – these may include property, vehicles or even foreign exchange as economic agents seek to hedge against loss of value.”