NDAMU SANDU
Former Finance minister Tichaendepi Masaya has said Government has to contain its appetite to borrow from the domestic market which is creating instability in the financial market.
Government is borrowing from the domestic market by issuing TBs to fund its runaway expenditure.
Official figures show that treasury had a budget overrun of $1,4 billion during the first six months of the year while interest paid on domestic debt was above $100 million amid indications that government is rolling over maturities.
This also comes as the latest stats from the RBZ (May) show that broad money increased by 5,39 percent, to $8,55 billion in May 2018 from $8,11 billion in April 2018.
In in an interview with Business Times, Masaya also said fiscal discipline by government was key to steering economic revival.
Masaya was Minister of State for Finance and working under the leadership of Bernard Chidzero then senior Minister for Finance and Economic Development in the period 1988 to 1995. He was in charge of investments and coordination of projects and would remain there until 1995.
Masaya said government needs to buy back the excess liquidity and will need to reintroduce the open market system thereafter.
“The over-supply of Treasury Bills (now estimated at around $5,5 billion) is creating shortages and worsening government borrowing in the domestic market,” he said adding that this had been done on top of government’s debt to the private sector.
“The impact of the issuances is that money supply will continue to increase especially as RBZ will have to print more RTGS dollars to honour the T-bonds on maturity.
“When that happens, it causes asset price inflation, including pushing up equities, properties as well as the parallel rate for USD. Therefore, there is need to keep this in check by mopping up excess liquidity.”
The economist, who retired from the University of Zimbabwe last year, however, said the central bank requires a national currency to undertake open market operations as a monetary policy measure.
Wading into the currency debate, Masaya said Zimbabwe should use some of its internationally traded minerals as a guide which should determine whatever currency the economy uses as a medium of exchange.
“Currency relates to a commodity which forms a part of our exportable, I mention gold and diamond. If you target that, you have a reference base which you say there is outflow of diamond and inflow of foreign currency and therefore the Reserve Bank can use currency in relation to inflows or returns on our exportables,” he said.
The veteran economist said they should have had a programme to return to the local currency when the economy introduced a multicurrency regime in 2009.
“Conditions given at that time had no programmes that when we went to the multicurrency, this is the programme which will allow for adjustments back to the Zimbabwean currency. Each time you adjust your foreign currency or introduce foreign currency, you must know it will take time before you manage your balance of payment, domestic expenditure and introduce reasonable taxation programmes,” Masaya said.
Zimbabwe abandoned its currency in 2009 in favour of a basket of currencies which is now dominated by the United States dollar. The local currency was demonetised in 2015.
It was under Masaya’s tenure when the economy adopted the Economic Structural Adjustment Programme.
“ESAP, for us, achieved the purpose for which it was intended. But clearly, it needed the support of everyone in government and the nation because it needed sacrifice and willingness to change from old habits,” Masaya said.
And now there is speculation that government might introduce a second ESAP, albeit under a different name.
When ESAP was introduced, Masaya said, politicians accepted control of its expenditure to fit into the plan. Because people could not announce what they want to do in their constituencies, the politicians found themselves constrained. They had to look for someone to blame and found IMF.
“Yet IMF was merely saying if we are to support you, they want to know how you are going to create a surplus balance of payment in order to finance their payment,” he said.
Masaya speaks glowingly about ESAP saying if the economy had continued with the trajectory, it would have maintained its currency.
“Secondly, the agriculture sector would have expanded and the balance of payment would have been in place and deterioration of education infrastructure especially in rural areas would not have happened. Policies that followed were worse than conditions of ESAP while the financial sector was disturbed and this saw the exit of merchant banks and discount houses from the financial sector,” he said.
Yet Zimbabwe had at independence inherited structure of an economy which was under sanctions during the Ian Smith’s regime.
Under those conditions, government’s control of prices, allocation of foreign exchange, use of parastatals to do the job which private people should have done was effectively implemented, Masaya said. The exchange rate was fixed and generally overvalued and the balance of payment was “enthusiastically managed without excessive deficit on the balance of payment”.
“There was no serious inflation to talk of. Unemployment was of no concern under that regime because the system was segregated and no free education to worry about at that time. When we continued under that system where the government was mounting free education system which involved government expenditure, higher taxation, it was found that the dollar needed to be adjusted to make it possible to increase exports and initially it was devalued,” he said.
The first thing which was done was to devalue the Zimbabwean dollar which helped to increase the exports as it was reasonably priced.
But it was not enough.
“At that time we had an obligation to transmit dividend payments which was controlled under Smith. So the people who could not export the dividend, under the Lancaster, were expected to now have the dividend paid. It was huge and we needed to find the foreign currency to do that.”
The need to restructure the economy was activated to have a flexible exchange rate, to remove price control on all goods and to reduce approvals of investment in Zimbabwe. There was so much bureaucracy, Masaya said, leading to the creation of the Zimbabwe Investment Centre.
The Venture Capital of Zimbabwe was established to finance and teach small companies how to run businesses with the International Finance Corporation, a private sector arm of the World Bank becoming a shareholder alongside the Commonwealth Development Corporation, Swiss Corp and Reserve Bank of Zimbabwe.
The ministry of Finance, Masaya said, made it possible for discount houses to develop and function well and enhance the power of the Reserve Bank in open market operations. It worked well, he said, adding that agriculture did well under ESAP.
“In order to meet our obligation such as free education, new machinery, we had to borrow money from external financial institutions so as to stabilise our exchange rate. We were expected to achieve that within five years,” he said.
