RBZ must tame quasi-fiscal activities to aid economic recovery

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By Gilbert Muponda

ZIMBABWE’S Central Bank released its much awaited Monetary Policy Statement on April 30, 2008. The full statement can be viewed at www.rbz.co.zw.

Whilst the Statement had some positive measures, it will come short in terms of addressing the nations current problems due to its over reliance on Quasi-Fiscal Activities (QFA) as a tool to both stimulate production and lower inflation.

QFA are defined as operations and actions whose effect can and should in principle be carried out by budgetary measures in the form of explicit tax, subsidy or direct expenditure. It is generally agreed that you can’t apply the same thinking logic that created the problem in your endeavour to solve the problem.

These activities, due to their nature as unbudgeted off-balance sheet expenditure, have been inflationary since they have been funded through printing of money. Whilst the statement sought to justify the printing of money by comparing it to the injection of funds to stabilise world financial markets, this is misleading and a totally misplaced comparison.

The cited examples of the UK and USA refer to countries whose governments still have strong tax base, generally strong asset base and attractive credit rating in the international financial markets. The injection of funds such as that on Bear Sterns, Northern Rock and other bail outs do not represent printing of money similar to what we have witnessed in Zimbabwe over the last 48 months.

It is well known all over the world that printing of money does not solve economic problems. If it did, then there would be no poor countries on this planet. Conversely, if it worked, all countries would simply invest heavily in money printing machines.

The recent statement was positive in admitting that the economic problems would not be solved in the absence of political settlement. This is positive in that one would assume the authorities will focus their efforts on creating a conducive environment for political engagement and economic recovery than trying to be all things to all people or doing all things in all sectors.

On the positive side as well was the relaxation of the foreign exchange market with an attempt to float the Zimbabwe dollar. The rate decline will attract more forex. But due to Zimbabwe’s hostile operating environment, the supply of forex may not improve and the currency collapse will continue as exports remain subdued.

However, the positive thing is more forex will be attracted into the official channels since the black market rate will likely merge with the official floated rate.

Whilst indigenisation is desirable, the statement correctly advises caution at the manner and rate at which locals acquire foreign-owned businesses. This is critical to avoid further capital flight.

Whilst food prices are going up globally it is disappointing that the statement focused on other countries which have historically never been self reliant on food production. At this stage, the analysis should have focused on how a poorly implemented strategy led an exports-reliant country to be a donor-food recipient.

There are lessons in this as Zimbabwe embarks on its next phase of localisation (indigenisation as they have called it) of key sectors of the economy.
Sanctions may have caused some problems and challenges, but it goes without saying that sanctions were not invented for Zimbabwe. Sanctions have been there and will be there, but there are nations that have been under sanctions and have managed to keep the economies in working order (Zimbabwe before 1980 and South Africa before 1994).

The point needs to be made that just before a nation decides to embark on a policy that may attract sanctions, it should make a plan beforehand on how to handle such sanctions. Some actions are clearly going to attract reactions and it is such reactions which nations must do their homework and be prepared to wither when they occur.

Quasi-fiscal activities are motivated most of the time by the desire to hide what are essentially budgetary activities for political or other reasons. Examples include subsidised credit facilities and lending to groups of borrowers with inadequate collateral or with unbankable business proposition. By shifting what are essentially taxes and subsidies from the government account to central bank account, QFA severely distort the measurement of revenue and expenditure as to render attempts to assess fiscal policy meaningless.

QFA create contingent implicit liabilities which the government is expected to fulfil thereby mortgaging the nation’s future without proper approval. Since QFA are normally meant to circumvent the normal budgetary process, they end up being funded by printing money which leads to hyper inflation is unchecked.

The government through the RBZ and various other bodies should focus on creating a conducive atmosphere for production. This will widen the tax base as more people are incorporated into the formal economy and businesses contribute in the form of corporate tax. Attempts to have a command economy in this day and age, with the RBZ dipping its fingers into anything and everything, will only result in further distortions and weaken the country’s industrial capacity as no meaningful private sector investment will take place in an unstable environment.

The use of off-budget balance sheet activities for public policy purposes that can be duplicated by specific fiscal measures, such as taxes, subsidies or other direct expenditures leads to policy instability. Public enterprises, for instance, are used to promote or subsidise certain groups through below-market pricing.

These quasi-fiscal activities disguise the size of the government, cause over-consumption and waste, and contribute to macroeconomic imbalances. This leads normally to an increase in monetary expansion which is unmatched by supply and as a result, inflation can set in.

QFA are not encouraged as they by-pass normal check and balances as offered by the proven systems such as parliament and several parliamentary committees which keep expenditure in line with revenues as provided by budget.

Private spending consists of purchases of goods and services by consumers, by businesses for investment, and net exports (exports minus imports). Governments raise revenue from taxes such as the income tax, sales taxes and payroll taxes, and from other sources to spend on such things as health care, education, pensions, social assistance and defence.

This process is guided by the national budget which is crafted by the ministry of finance after consulting with other government departments. This process is critical and is the foundation of public finance. Once the government ascertains its needs, it then looks at ways to fund them. The budget spells out all this.

The point is to make sure government properly spends within its limits so as to maintain a sustainable budget policy. Any expenditure not provided for in the budget then exposes the nation to the risk of printing money to cover for unbudgeted expenses. This is why Quasi-Fiscal Activities are undesirable, as they hide government expenditure and revenues in the same way off-balance sheet transactions hide a company's true financial position.

The RBZ has come up with various programmes providing subsidised funding. These facilities whose rates are as low as 25% include the Agricultural Mechanisation Program (AMP), the Agricultural Sector Productivity Enhancement Facility (ASPEF) and the Basic Commodities Supply-Side Intervention Facility (BACOSSI).

These facilities represent a hidden tax since this money is not at market rates. It means someone (tax payer) is subsidising these facilities through an undeclared tax. As noted above these facilities lack any relation to reality. The only reason why this money is so cheap is because it’s printed money which mistakenly is being viewed as a benefit, ignoring the more disastrous impact on money supply and inflation. Forward incentives like giving cheap money on promise of production tend to encourage corruption and resource diversion. They need to be replaced by rewarding in retrospect (pay a premium on actual goods produced).

As a direct result of QFA, the central bank has moved into areas which it doesn’t have expertise or capacity. This has dangers especially in terms of giving out loans with no capacity to carry out a proper credit assessment and put in place measures to recover the money.

Once a lender like the RBZ gets involved, borrowers are attracted to such a lender since this lender lacks proper capacity to monitor the loans dished out. The RBZ becomes lender of preferred choice as borrowers stampede for loans which in all likely-hood they would never have to repay. Commercial Banks and other financial institutions are better-placed to be providing loans as they have long built check and balances to monitor loans and give other assistance to allow clients to repay the loans in full.

The recent threats to revamp entities such as Zimbabwe Development Company with a view to take over "unpatriotic" companies represents an extension of QFAs. The now much-talked about People's Shops can’t be viewed differently from the controversial Operation Dzikisa Price.

If all other Supermarkets can’t provide cheap food, how can the People's Shops do it without being subsidised? This is how QFA activities mislead the market and distort resource allocation. This trend discourages business to invest. As a result, shortages will follow leading to increased black market activities and runaway inflation. The formal sector will be further eroded as most economic activity goes under ground to escape unsound policies.

Gilbert Muponda is a Zimbabwe-born entrepreneur, exiled in Canada. He can be contacted at gilbert@gilbertmuponda.com. See his website: www.gilbertmuponda.com

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