RBZ to resume public auctions

The central bank cannot effectively discharge its core function as the lender of last resort with a $1,35 billion debt in its books

Golden Sibanda Senior Business Reporter
THE Reserve Bank of Zimbabwe will soon resume public auctions to raise funding required to finance key Government programmes and move away from private placements with investors.

The central bank has in the recent past been directly approaching individual investors to take up Treasury Bills to raise funds for Government. But the system does not guarantee a defined yield gap.

RBZ Financial Markets deputy director Mr William Manhimanzi told a KPMG international financial reporting standards and business seminar last week that a committee, made up of RBZ and Ministry of Finance officials had already been set up to work on the return to Open Market Operations.

OMOs pertain to the buying and selling of Government securities, usually to influence liquidity in the economy, but most importantly, to mobilise funds for public sector projects.

“A lot of funds have been raised through private placements. We will be going back to the proper discernible open market system so that we get a proper yield gap,” Mr Manhimanzi told the delegates.

The financial markets deputy director said OMOs were more transparent and ensured a discernible yield gap, meaning all investors get similar returns at a coupon rate more affordable to Government.

In the past, individual investors would negotiate different rates for their funds and in some instances this resulted in huge rate differentials, some coming at a markedly higher cost to Government.

Mr Manhimanzi, however, noted that OMOs have a downside of their own such as when the central bank goes on the market with a defined interest rate,and fails to raise the targeted amount of money.

Nonetheless, OMOs are the most open and transparent system for mobilising financial resources to support key Government programmes in light of the critical need to build market confidence.

Government has been using, largely, Treasury Bills to raise funding on the domestic market, at a time tax revenues have continued to shrink due to the difficult economic conditions in Zimbabwe.

The Government security strategy is being used to clear the central bank’s $1,2 billion liabilities to enable the bank to resume many of its key functions crippled by the decade of economic crisis.

However, economists warn that OMOs need to be used with restraint, especially in a country where the central bank does not print money, as Government can crowd out private sector borrowing.

OMOs are a key monetary policy instrument central banks can use to manage banking sector deposit reserves, interest rates, economic production and management of Government debt among others. Meanwhile, the Reserve Bank says it has mobilised $136 million under the $200 million African trade backed securities guarantee by the African Export and Import Bank for restart of the interbank market.

Mr Manhimanzi said $94 million of the funds raised has since been extended to a total four banks. The RBZ is now evaluating requests from two more banks seeking liquidity support under the facility.

However, Mr Manhimanzi said the banks must meet a few other conditions, but would not specify details of the nature of the conditions.

“The bank has raised $136 million in Aftrades and the bulk of those funds have been loaned out. The target is to raise $200 million,” he said.

Mr Manhimanzi said the RBZ was pleased with the manner in which the domestic interbank market, abandoned in 2008 at the height of economic crisis and hyperinflation in Zimbabwe, had resumed. The interbank is a market in which banks extend loans to one another for a specified term to cover deficits. Most interbank loans are for maturities of one week or less, the majority being overnight.

The central bank is providing trade-backed securities to banks facing liquidity constraints to be able to borrow from surplus institutions.

This approach followed realisation that surplus banks were insecure to lend deficit banks due to inherent liquidity risk in the market.

The interbank had collapsed because surplus banks feared this would leave them in deficit in the event that borrowers failed to repay the funds.

Banks with excess liquidity would assist those in short positions even in instances where an individual would have excess as much as $200 million.

Mr Manhimanzi said domestic banks were now able to secure liquidity support in the banking sector at an average interest rate of 8,5 percent.

The $200 million guarantee by Afreximbank for the resuscitation of the interbank market was extended at an annual interest rate of 7 percent.