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Interest
rates bloat public debt
Dumisani
Ndlela, The Zimbabwe Independent
June 30, 2006
http://www.theindependent.co.zw/viewinfo.cfm?linkid=11&id=4110&siteid=1
ZIMBABWE’S domestic
public debt appeared set for a major explosion due to exorbitant
financing costs, central bank statistics revealed this week.
Government debt
doubled in a space of 15 days to $43 trillion by mid-June after
reaching $21 trillion on June 2.
Bank sources indicated
that unpublished estimates place the debt level at $48,2 trillion.
The sharp hike
in debt had been spurred largely by high interest rates on government
debt, most of which is held through short tenor treasury bill (TB)
instruments.
Government debt
held through TB stock amounted to $17 trillion by June 16, with
interest on the TB stock amounting to $22 trillion, more than double
the principal TB debt on June 2 of $8 trillion.
"We’re in a bind,"
said analyst Washington Mehlomakhulu of Highveld Financial Services.
"The method of funding debt is a major concern."
Reserve Bank of
Zimbabwe (RBZ) governor Gideon Gono last year adopted measures making
government securities, especially TBs, more attractive to private
sector investors in order to attract funds to finance the large
government deficits.
Investors had
been directing their funds mainly to the equities market, shunning
the money market because of weak returns. Gono had shortened the
tenor of the TBs and increased returns on the money market instruments.
This had the effect
of attracting funds back to the money market. However, this came
at a huge cost to government as the cost of financing the short
term paper had the effect of blowing up the domestic debt.
The yield on 91-day
TBs is currently at 510%. Assuming the government continues to issue
91-day paper at this rate, the effective rate compounded quarterly
is 2 569% annualised. "The cost of running that debt is worrying,"
said Mehlomakhulu.
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