Business / Companies
Cabinet approves takeover of US$1,35 billion RBZ debt by govt
27 Nov 2013 at 19:47hrs | Views
CABINET has approved the takeover of the US$1,35 billion Reserve Bank of Zimbabwe debt by Government in what should pave the way for the smooth recapitalisation of the central bank and repayment of foreign currency account balances taken over during hyperinflation.
Government will assume the RBZ's domestic debt of US$754,3 million to add it to its existing domestic stock of US$390 million, to give a total outstanding domestic stock of US$1,1 billion.
The central bank's external debt stands at US$596,02 million which will become part of its stock of existing external debt of about US$7 billion.
According to the proposal seen by The Herald, the debt would be paid through issuance of Treasury Bills (TBs) to banks from which the amounts were levied by the RBZ.
This will be subject to the understanding that the banks will immediately settle small amounts owed to non-corporates of US$500 and below, without waiting for the maturity of the TBs.
The TBs will have a two to five year tenure as reflected in the accounts sitting with the affected banks. The proposed interest rate for these instruments is between 3,5 percent and 5 percent per annum.
In addition, prescribed asset status and features like tax exemption may be granted to the instruments. Government also adopted to settle Statutory Reserves totalling US$83,4 million owed to banking institutions by the RBZ.
The first maturity on the two-year TBs of US$25 million is due on December 31, 2013 while other maturities amounting to US$146 million are due next year. Government will therefore repay the principal amounts on the TBs in staggers from 2015 onward.
The move will go a long way in restoring confidence in the banking sector as well as improve the liquidity of firms whose FCA balances are locked up in the RBZ. For banks, it would enable conversion into earning assets and at the same time ensuring that the maturities do not constrain current Government commitments.
Several companies, NGOs and individuals have instituted legal proceedings against the RBZ over the past couple of years to recover their monies, which the central bank withdrew from bank accounts.
Finance Minister Patrick Chinamasa said Government was making efforts to improve the financial sector.
"We need to restore the role of the RBZ as a banker to Government and as lender of last resort. We need to capacitate the RBZ to supervise the financial services sector adequately as well as establishing interbank lending. All that will cost money but if we demonstrate confidence I am sure that the money will come. For instance the capitalisation of RBZ requires a cool US$200 million while re-establishing interbank lending will need US$400 million," he said.
The move paves way for the recapitalisation of the institution by both local and foreign investors. It will also facilitate the ability of the central bank to engage in fruitful commercial relationships, which include the mobilisation of foreign lines of credit on behalf of the commercial banks.
This also means that whoever is taking over from Governor Dr Gideon Gono, whose term of office expires this week, will start on a new slate.
Legislation for the assumption of the debt by Government would have to be enacted.
Banks have been calling for the issuance of the TBs to deal with the issue of the FCA balances including the interest accrued to date.
The taking over of the debt calms fears that possible lawsuits could have affected banking operations following an October Supreme Court order for Standard Chartered Bank to reimburse one of its clients' cash which it had surrendered to the central bank.
A legal opinion made by Scanlen & Holderness (and seen by this paper) had advised banks to defend the claims being made by the depositors.
"Financial institutions should engage Government, and highlight that it is unconstitutional for Government to take over currency for no value even though it is common in situations of national bankruptcy hyperinflation. Expropriation without compensation is prohibited by section 71 of the Constitution and was prohibited by section 16 of the old Constitution."
Banks had proposed instruments with staggered maturities between one year and four years and that the rates to be used, be on a sliding scale from 7 percent for the first year to 4 percent on the fourth year.
The security will be a credit guarantee from the Ministry of Finance as well as a guarantee from the Government. However Government opted for 3,5 to 5 percent interest rates which, though lower than the rates prevailing in the local market, are still slightly higher than global charges which are between 1,5-3 percent.
Market analyst Jerome Negonde said; "As far as the economy is concerned the interest rates are real, especially when you factor in the country's sovereign risk. However, if you compare against the other rates elsewhere then you can see Zimbabwe is two or three times higher than global rates where countries like Japan are on 1,5 percent" .
If they are tradable the liquidity of banks will improve as they can trade the instruments in the interbank market.
It would also provide holders of such securities with some form of collateral security while the issuance would also offer insurance companies and pension funds an alternative to invest in. However, the downside is that the move piles more IOUs onto the already existing Government debt.
Given that the risk of default within Government is high, parallel to this transaction the Government should now come up with a holistic plan of action regarding debt servicing and repayment. Without that plan that lack of confidence will still exist, thus rendering
Government securities worthless pieces of paper which no investor would be keen to hold onto.
The debt repayment strategy should also be in tandem with Zim Asset with realistic goals and targets.
Maybe rather than focusing on the creation of a Sovereign Wealth Fund some of those dividends from the assets could be used as collateral security for these treasury bills, that is, treasury bills backed by future earning from the mines.
Economists say, if successful Government can use the same model to demonetise Zimbabwe dollar balances, which are still a contentious issue among the general public.
Government will assume the RBZ's domestic debt of US$754,3 million to add it to its existing domestic stock of US$390 million, to give a total outstanding domestic stock of US$1,1 billion.
The central bank's external debt stands at US$596,02 million which will become part of its stock of existing external debt of about US$7 billion.
According to the proposal seen by The Herald, the debt would be paid through issuance of Treasury Bills (TBs) to banks from which the amounts were levied by the RBZ.
This will be subject to the understanding that the banks will immediately settle small amounts owed to non-corporates of US$500 and below, without waiting for the maturity of the TBs.
The TBs will have a two to five year tenure as reflected in the accounts sitting with the affected banks. The proposed interest rate for these instruments is between 3,5 percent and 5 percent per annum.
In addition, prescribed asset status and features like tax exemption may be granted to the instruments. Government also adopted to settle Statutory Reserves totalling US$83,4 million owed to banking institutions by the RBZ.
The first maturity on the two-year TBs of US$25 million is due on December 31, 2013 while other maturities amounting to US$146 million are due next year. Government will therefore repay the principal amounts on the TBs in staggers from 2015 onward.
The move will go a long way in restoring confidence in the banking sector as well as improve the liquidity of firms whose FCA balances are locked up in the RBZ. For banks, it would enable conversion into earning assets and at the same time ensuring that the maturities do not constrain current Government commitments.
Several companies, NGOs and individuals have instituted legal proceedings against the RBZ over the past couple of years to recover their monies, which the central bank withdrew from bank accounts.
Finance Minister Patrick Chinamasa said Government was making efforts to improve the financial sector.
"We need to restore the role of the RBZ as a banker to Government and as lender of last resort. We need to capacitate the RBZ to supervise the financial services sector adequately as well as establishing interbank lending. All that will cost money but if we demonstrate confidence I am sure that the money will come. For instance the capitalisation of RBZ requires a cool US$200 million while re-establishing interbank lending will need US$400 million," he said.
The move paves way for the recapitalisation of the institution by both local and foreign investors. It will also facilitate the ability of the central bank to engage in fruitful commercial relationships, which include the mobilisation of foreign lines of credit on behalf of the commercial banks.
This also means that whoever is taking over from Governor Dr Gideon Gono, whose term of office expires this week, will start on a new slate.
Legislation for the assumption of the debt by Government would have to be enacted.
Banks have been calling for the issuance of the TBs to deal with the issue of the FCA balances including the interest accrued to date.
The taking over of the debt calms fears that possible lawsuits could have affected banking operations following an October Supreme Court order for Standard Chartered Bank to reimburse one of its clients' cash which it had surrendered to the central bank.
A legal opinion made by Scanlen & Holderness (and seen by this paper) had advised banks to defend the claims being made by the depositors.
"Financial institutions should engage Government, and highlight that it is unconstitutional for Government to take over currency for no value even though it is common in situations of national bankruptcy hyperinflation. Expropriation without compensation is prohibited by section 71 of the Constitution and was prohibited by section 16 of the old Constitution."
Banks had proposed instruments with staggered maturities between one year and four years and that the rates to be used, be on a sliding scale from 7 percent for the first year to 4 percent on the fourth year.
The security will be a credit guarantee from the Ministry of Finance as well as a guarantee from the Government. However Government opted for 3,5 to 5 percent interest rates which, though lower than the rates prevailing in the local market, are still slightly higher than global charges which are between 1,5-3 percent.
Market analyst Jerome Negonde said; "As far as the economy is concerned the interest rates are real, especially when you factor in the country's sovereign risk. However, if you compare against the other rates elsewhere then you can see Zimbabwe is two or three times higher than global rates where countries like Japan are on 1,5 percent" .
If they are tradable the liquidity of banks will improve as they can trade the instruments in the interbank market.
It would also provide holders of such securities with some form of collateral security while the issuance would also offer insurance companies and pension funds an alternative to invest in. However, the downside is that the move piles more IOUs onto the already existing Government debt.
Given that the risk of default within Government is high, parallel to this transaction the Government should now come up with a holistic plan of action regarding debt servicing and repayment. Without that plan that lack of confidence will still exist, thus rendering
Government securities worthless pieces of paper which no investor would be keen to hold onto.
The debt repayment strategy should also be in tandem with Zim Asset with realistic goals and targets.
Maybe rather than focusing on the creation of a Sovereign Wealth Fund some of those dividends from the assets could be used as collateral security for these treasury bills, that is, treasury bills backed by future earning from the mines.
Economists say, if successful Government can use the same model to demonetise Zimbabwe dollar balances, which are still a contentious issue among the general public.
Source - Herald
