Dump quasi-fiscal operations, RBZ told

LIVINGSTONE MARUFU

The Reserve Bank of Zimbabwe (RBZ) has been advised by the World Bank and several analysts to cease all quasi-fiscal operations (QFOs) and unbudgeted spending due to concerns that an expansionary monetary policy would push inflation and the exchange rate.

They said that despite turning over some QFOs to the Treasury, the RBZ has pursued a number of other initiatives.

Zimbabwe’s inflation has been significantly impacted, for instance, by ongoing subsidies on bank loans, imports of agricultural machinery and inputs, the allocation of foreign currency at subeconomic exchange rates, the minting and selling of gold coins at below-market prices, and the facilitation or funding of imports of various foodstuffs or basic commodities.

The World Bank recently advised RBZ to transfer US$3.6bn of its total external liabilities to the Treasury as soon as possible, since it had only transferred US$1.8 bn

The Bretton Woods institution has also voiced concerns with the foreign currency retention threshold, claiming that it encourages RBZ to continue participating in QFOs.

“End all QFOs and unbudgeted expenditures. The matrix calls for all RBZ liabilities to be formally moved to the treasury’s books, and for all government transactions to be carried out at market rate [unless via on-budget subsidies]. It also calls for the ending of the forex retention policy,” the World Bank said.

“To ensure price stability and budget transparency, it is critical that RBZ completes transfer of these external liabilities to the Treasury [to be serviced through tax revenue which does not increase money supply], and that all government transactions are conducted at market rates [or otherwise explicitly reported as a subsidy].

“While the imposition of a 25% forex retention policy currently helps to distribute foreign currency to strategic non-generators of foreign currency and sustain the dual currency environment, it acts as a tax on the tradable sector. As such, there is a need to end the forex retention policy to improve the competitiveness of Zimbabwe’s exporters.”

A number of economists and economic analysts  said RBZ  should cease conducting QFOs  in order to stabilise the exchange rate and inflation.

“The advice is on point as it echoes what we have been saying since 2018. Quasi fiscal activities are the primary reason for local currency instability, artificial demand for foreign currency, high levels of inflation and economic volatility affecting business incomes.

“Money supply growth exceeds 400% on an annual basis and the market cannot achieve stability when the economy is only growing at 3-4%,” economic analyst  Victor Boroma told Business Times.

He added: “The following are some of the activities the central bank engages in or at some point engaged in providing subsidised loans to commercial banks, providing subsidised loans to state entities, funding gold production and funding tobacco production and exports.

“RBZ is involved in contracting offshore resource backed loans, subsidising machinery imports, subsidising imports of agricultural inputs, funding fuel imports, allocating foreign currency at sub economic exchange rates, minting gold coins and selling below market rates and facilitating or funding imports of various foodstuffs or basic commodities. These are the things that the central bank should  transfer to the Treasury.”

According to economist Tinashe Kaduwo, the Reserve Bank of Zimbabwe continues to finance numerous initiatives, which is making it more difficult to control inflation and the exchange rate.

“Yes indeed RBZ is still doing quasi-fiscal activities in various forms. Some of them are subsidised bank loans in various sectors such as agriculture, manufacturing, small businesses and some target groups such as women and youths. These loans often come with lower interest rates than market rates.

“Also,  RBZ is the sole buyer of some special minerals. This was done to promote mining activities and improve transparency on the trading of special minerals. Special minerals are the number one source of foreign currency,” Kaduwo said.

According to economist Tony Hawkins, there is no doubt that the central bank is funding and subsidizing a number of initiatives.

“It is obvious that the government is  borrowing  from the RBZ to  finance  spending overruns. Seasonal variations in inflows and outflows and unbudgeted spending in the year to November 2023.

“Deficit arises because trillions  in government spending is off-budget [quasi-fiscal] and where it was spent is not known but wage awards were way above  budget as was spending on agriculture,” Hawkins said.

The World Bank said the RBZ’s quasi-fiscal operations have also driven up inflation.

“Limited access to external financing, combined with a tight fiscal policy resulted in a situation where RBZ directly financed external debt servicing payments (liabilities) by printing money.

“In previous years, the RBZ also made transfers to the real sector through agricultural subsidies, support for state-owned enterprises (SOEs), and incentives for gold production. In 2022, the RBZ’s payments on these QFOs accounted for 2.5% of GDP [World Bank-IMF DSA, 2023].

“These resulted in an expansionary monetary supply and a deterioration in the RBZ’s balance sheet. Broad money growth duly rose from 55% in September 2021 to over 1000% in June 2023. The joint impact of global price rises and increased domestic money supply drove up inflation, with major peaks in August 2022 and June 2023,” reads part of the  World Bank statement.

It said since June 2023, the RBZ has been proactive in tightening monetary policy; increasing reserve requirements for the banking sector, and raising the bank policy lending rate.

Furthermore, reserve money growth was curbed by issuing non-negotiable certificates of deposits (NNCDs) and Gold-Backed Digital Tokens to absorb excess Zimbabwe dollars, according to the World Bank.

The report said the fiscal deficit is projected to moderate in 2024, though risks remain high and interest payments from servicing QFOs debt are projected to increase significantly, posing liquidity risks amid limited access to concessional financing.

The fiscal deficit is projected to decline to under 2%  in 2024 and 2025 and management of fiscal policy is likely to remain challenging due to public debt unsustainability.