Govt breaks the bank!

PHILLIMON MHLANGA

Government’s overdraft at the central bank hitting $2,3 billion against the stipulated limit of $762,8 million in the eight months to August as it failed to rein in runaway expenditure.

Every year, government borrowing from the central bank is capped at 20 percent of its revenue in the previous year. The Zimbabwe Revenue Authority, which is government’s tax collection agency, reported a net revenue collection amounting to $3,750 billion last year, meaning government’s Reserve Bank of Zimbabwe (RBZ) overdraft, which stood at $2,3 billion at the end of August, should not have exceeded $762,8 million.

Finance minister Mthuli Ncube said on Monday the budget deficit had reached unsustainable levels and there was need to tackle the monster so that it will not be an albatross on the growth of the economy.The presentation was Ncube’s first as the Minister of Finance and Economic Development. The former chief economist and vice president of the African Development Bank was co-opted into President Mnangagwa’s new Cabinet last month.

The effects of government overshooting the prescribed overdraft limits have been clearly reflected by an escalation of money supply, which has resulted in increased inflationary pressure in the economy. Going forward, Ncube called for belt tightening and promised to uphold the statutory lending limits.

“Consequently, government will effectively limit the use of the RBZ overdraft facility and curtail RBZ advances to government in line with Section 11 (1) of the Reserve Bank Act (Chapter 22:15), which states that borrowing from the Reserve Bank shall not exceed 20 percent of the previous year’s government revenues at any given point,” Ncube said.

Economists slammed the excessive government spending, which has spiralled out of control, saying it was due to lack of fiscal rectitude, as well as misplaced priorities.

“There was euphoria of hope after the coming in of the new administration, but today we are finding ourselves in an economy whose indicators are worsening,” economist Kipson Gundani and chief executive officer of CEO Round Table told delegates attending the Institute of Chartered Accountants of Zimbabwe (ICAZ)’s public sector convention held in the capital on Tuesday this week.

“Why is this economy failing to improve?” he asked. It’s because of our government which is consuming more than what they have. “(Is it that) we have an inept government? Do they really think they can cheat the market? You really wonder if our government has what it takes to deal with the ills (of this economy). One also wonders if there is political will (to contain expenditure).

“You will discover that Zimbabwe has a history of failed economic reforms. There is no economic explanation to reform failures. We have a government which has a huge appetite for expenditure. Our government is consistently and persistently into this. And you think you can really sustain this through the famous thing called treasury bills (TBs) and overdrafts.

It’s more of fiscal indiscipline instead of the need. It shows that our government has resorted to ancient economics, which was practiced even before (the emergence of the godfather of economics) Adam Smith. But, the truth is you cannot cheat markets because human beings look to maximize their utility.” he said.

Zimbabwe has persistently run widening budget deficits, funded mainly through the issuance of Treasury Bills (TBs) and borrowings from the central bank, a move which has also fuelled inflation.

The issuance of TBs, which are short-term debt instruments backed by government, underlines how government had crowded out the private sector on the money market.

Speaking at the ICAZ event, economist John Robertson said he was happy that Ncube “revealed the truth for the first time that government was getting it wrong by not sticking to prescribed overdraft limits and the uncontrollably issuance of TBs, which crowd out the private sector”.

Robertson said government has pressed the self-destruction button by destroying the collateral value of land which was in the past used as collateral to secure bank loans. Government has offered farmer 99year leases which banks have found unattractive. “

If we secure agriculture, it will lead to manufacturing rebound. I believe in market forces, which I think are more powerful than government interventions where it (government) is specialising on serious overdrafts and production of TBs which are fuelling inflationary pressures,” he said.

Ncube, on Monday revealed that issuance of TBs had surged by a massive 262 percent to $7,6 billion by the end of August this year from $2,1 billion in 2016. “In 2014, TBs to gross domestic product (GDP) ratio was at 4,4 percent and increased sharply to 36,5 percent by end of August 2018.

This is a cost to government. Excessive issuance of short-term debt instruments at high interest rate also crowds out the private sector and compounds the increase in government recurrent expenditure,” he said.

“Accordingly, government in its management of domestic borrowing is reviewing the use of TBs in support of socio-economic development programmes.” In the outlook, Ncube said Treasury “will seek to finance government’s vital socio-economic development programmes by use of instruments that crowds in the private sector, including public private partnerships or government guarantees to financial institutions”.

“Such guarantees will only be a contingent liability to government, unlike TBs that have a direct and immediate cash flow implication on government.”

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