Without effective monetary instruments, draining surplus liquidity can be a daunting task for many central banks. Under normal circumstances, open Market operations (OMO) in various forms are the main mechanism through which central banks provide or withdraw liquidity to/from the money market, steer short-term interest rates and signal the stance of monetary policy.
Most central banks have at their disposal various types of open market operations and these include: issuance of debt certificates, foreign exchange swaps and fixed-term deposits among others.
Without sufficient securities, the central bank’s success in draining surplus reserves will be limited, as will any impact on interest rates. Government securities and central bank bills are the main debt instruments used and to different degrees, the primary issuances of them have been used to drain surplus liquidity.
For monetary policy and liquidity management purposes, the focus is typically on government securities (treasury bills) and central bank bills with maturities of less than a year. Both securities have low credit risk (virtually zero credit risk) and are located at the bottom end of the risk/return spectrum.
The Reserve Bank of Zimbabwe just issued Treasury Bills that were said to be for Government expenses and this comes as a delight to the central bank as this will help suck excess liquidity from the economy thereby reducing inflationary pressures in the economy.
We have seen the local currency continue to lose footing against the greenback this year and bids have risen to an all-time high during the period, showing that liquidity had increased in the economy. Likewise the stock market saw massive gains in the first two months as investors hedged against inflation.
The method proved to be a winner in January as inflation came in higher for both month on month and year on year.
However, the Treasury Bills also come at a time that the government has to back its plan on vaccination by being proactive and not just wait for donations to drive the program forward. In order to be proactive, the broke government had to borrow instead of print itself out of the mess and cause inflation.
It is under this notion that we think the government has issued the Treasury Bills in order to finance their Covid-19 programme, rather than suck excess liquidity in the economy.
As a result the issue has been a double edged sword to both the problems the country is facing right now – Harare