BANKS’ purchase of Treasury Bills and public sector borrowing may have triggered liquidity shortages prevailing in the market, a World Bank report has said.
BY BUSINESS REPORTER
Government has been borrowing on the domestic market to plug the fiscal deficit and repay the central bank and State-owned entities’ arrears. In the first six months of the year, the fiscal deficit was $623 million, with Treasury warning that the hole would surpass $1 billion by year-end if expenditure was left unchecked.
The wage bill for the civil services accounted for 96,7% of the total revenue generated in the first half of the year.
In a latest report entitled, Macro Poverty Outlook for Zimbabwe, the World Bank said from March 2015 to June 2016, government borrowing from the banking sector increased by $1,4 billion or about 10%. It said the borrowing was financed by TBs, which were purchased by commercial banks at a discount.
“Banks’ purchases of TBs and other public sector borrowing may have contributed to liquidity shortages and crowded out bank lending to the private sector. Faced with cash shortages, banks were unable to honour demand deposits. Quantitative limits on cash withdrawals,” the bank said.
It warned that the economic situation was projected to continue deteriorating in the absence of a strong adjustment programme. The World Bank said fiscal adjustment in the form of a reduction in the public sector wage bill was needed to prevent further accumulation of government borrowing from the banking system.
“Without a fiscal adjustment and/or access to external credit through arrears clearance, government will have to borrow from banks. This is likely to result in an accumulation of public debt, diminishing investor confidence and limiting Zimbabwe’s growth prospects,” it said.
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In his mid-term fiscal policy review statement, Finance minister Patrick Chinamasa proposed a salary cut for the civil service and forgoing of bonus payments for 2016 and 2017, as part of measures to cut runaway expenditure in the wake of dwindling revenue flows. The measures were thrown out by government, signalling Harare’s unwillingness to undergo ambitious reforms in line with prescriptions from the Bretton-Woods institutions.
The World Bank said greater transparency in the management of the conversion of interbank and cash dollars was a key challenge to ensure the unification of prices, which is vital for private and public transactions.
“Similarly, the recently introduced trade restrictions risk limiting competition, encouraging rent seeking, and discouraging efficient and competitive production, while also raising the cost of exports,” the bank said.
In July, government promulgated Statutory Instrument 64 of 2016 which restricts the importation of products that have local equivalent in a bid to boost local industries.
