THE Reserve Bank should stop participating in all quasi-fiscal operations but focus on monetary reforms in order to kick-start the country’s ailing economy currently being worsened by incoherent government policies, a UN agency has reported.
According to a report compiled by independent technocrats commissioned by the United Nations Development Programme (UNDP) country representative Agostinho Zacarias, a three-pronged plan could stem the economic recession that has been precipitated by bad policies.
Quasi-fiscal financing involve providing credit at low nominal interest rates to selected sectors whose prospects of repaying are so low that these credits are often viewed as subsidies.
The report titled Comprehensive Economic Recovery in Zimbabwe prescribes government to address macroeconomic fundamentals in the first two years, effect institutional and structural reforms and carry out a “second generation” institutional and structural reforms that are necessary to ensure sustainable and inclusive growth.
“There is a broad, although not complete agreement that, because Zimbabwe’s hyperinflation is directly attributable to fiscal expansion and reckless credit creation by the central bank, the starting point for stabilisation programme must be a combination of fiscal retrenchment and monetary constraint,” reads the report.
“The immediate priority is to terminate all quasi-fiscal operations and incorporate them into the national budget, as was tried in the 2007 but abandoned in the 2008 budget,” the report said.
The central bank governor, Gideon Gono has since 2004 undertaken quasi-fiscal operations in projects such as the Basic Commodity Supply Side Intervention (Bacossi), the Farm Mechanisation exercise and the Agricultural Support Enhancement Facility (Aspef) —— primarily funded by unprecedented printing of money. These measures have seen the central bank assuming what critics termed “supra-ministerial” powers that entail providing agricultural credit, farm inputs and food rations.
But the result has been a suppressed capacity utilisation in manufacturing, hyperinflation, a widely criticised foreign exchange regime and a prolonged economic recession when regional peers are booming.
The report however warned that the cessation of quasi-fiscal activities by the Reserve Bank could result in “knock-on” effects on agriculture, troubled parastatals, importers and the financial sectors. Instead the UNDP proposed an overhaul of the Zimbabwe Revenue Authority operations and the formalisation of the informal sector in order to improve treasury coffers.
The full extent of the country’s “fiscal crisis” according to the report is unknown, partly because of the “very substantial discrepancies” between budget data and statistics published subsequently by the Ministry of Finance. This match, the report stated was primarily caused by the withholding of quasi-fiscal activities from the annual budget statements since 2006.
“Although the full extent of the quasi-fiscal activities is unknown, estimates by the IMF put the overall financial borrowing requirement at 64% of GDP (Gross Domestic Product) in 2006, when the central budget deficit was 3% of GDP, implying a quasi-fiscal deficit of 61% OF GDP and of 82% in 2006,” the report said.
However official statistics released by the central bank in the mid-term monetary policy indicate that domestic debt ballooned to unprecedented levels surpassing three-quarters of GDP on the back of excessive government borrowing and an unprecedented money supply growth.
Handing over several implements to a government committee on food production this week, Gono defended his quasi-fiscal activities arguing that the United States Federal Reserve this week broke away from “orthodox and rigid” economic policies to save a “fierce financial meltdown” that was triggered by the near collapse of the US financial markets. The proposed US$700 billion plan to save the economy from rapid recession will be presented before the US Congress today.
“We have, however, not given up in innovating making positive difference in our economy,” he said.
“Those who follow the unfolding developments in the USA and European financial markets have now realised that what they are implementing as fire-fighting tools to fend-off the fierce financial meltdown in their backyards are in fact quasi-fiscal operations through their central banks.”
He added that the farm mechanisation programme would extend beyond 2010. Early this year, visiting International Monetary Fund officials advised the Reserve Bank to “eliminate” quasi-fiscal activities but Gono continued with the interventionist policies arguing that he was operating in “desperate situations” that called for non-text book economic measures.
By Bernard Mpofu