Government has relaunched the Treasury Bills auction system with an eye towards long term infrastructure bonds in the future. The current bills, however, are short term with the longest dated ones being 365 days. The exercise is in the words of Finance Minister Mthuli Ncube to simply test the market as they did not currently have a need for additional funds.

What are treasury bills?

Treasury bills, in essence, are short term (<1 year) government-issued securities yielding no interest but rather sold at a discount. To illustrate the government issues an instrument to which they will pay back $100 in years time. The purchaser of the security pays $75 dollars for it at the time of purchase but will receive the $100 and hence their benefit is the $25 payback.

A murky past

In recent times treasury bills were believed by commentators to be used by a bankrupt government to fund their expenditure gap. By forcing treasury bills on to banks the government essentially borrowed from the banks to fund day to day expenditure that they could not. This is one of the sources of our large government domestic debt. Relaunching the bills just after the recent Statutory Instrument 142 of 2019 seems a weird way to test the market.

Infrastructure bonds eyed

The government, in this case, has a view towards long term bonds coming on to the market, the proceeds of which will be used to fund infrastructure investment gap. Bonds are similar to Treasury but do have an explicit interest rate that accrues annually and can be paid annually or at maturity.  It’s an issue we’ve covered a few times on this platform and one which requires more attention as our government has spent only 11% of their budget on infrastructure even in times of surplus.

Our need to invest in infrastructure is self-evident through our perpetual problems with providing water and electricity. Both situations boil down to antiquated machinery for production and processing. However, it’s a little worrying to see the government borrowing for “no reason” as Ncube claimed.

The current treasury bills on offer are denominated as follows;
30 million maturing in 90 days at 16.5%
30 million maturing in 182 days at 19.6%
20 million maturing in 365 days at 17%.

The current yields are far below inflation and as result, these treasury bills are far from being attractive to any investors or whoever surplus cash. With alternatives like stock market still available they are likely to have very little impact.