Zimbabwe is currently experiencing the impact of inflationary pressures, which has affected both individuals and businesses.
It’s a stage in the economic cycle, which key economic policies, including the national budget has been trying to address, but its perpetuation has also been a result of the inefficient use of state finances.
Typically, the national budget is the main instrument through which the Government collect resources from the economy, in a sufficient and appropriate manner; and allocate and use those resources responsively, efficiently and effectively.
And to this extent, the budget can be utilized to prevent business fluctuations of inflation or deflation to achieve the objective of economic stability.
However, one area that has been lacking in Zimbabwe’s budgetary policy are clear measures to stop quasi-fiscal expenditures.
Quasi-fiscal (or ‘out-of-budget’) expenditures characteristically include undertakings by State entities in respect of public social expenditure such as payments for social services, public infrastructure, fuel subsidies and national debt servicing – just to mention a few – outside of the national budgetary process.
Zimbabwe’s apex bank, the Reserve Bank of Zimbabwe (RBZ), has been particularly complicit in this.
Responding to a question on the central bank’s quasi-fiscal activities and the rapid growth of money supply circa 2008 by the Parliamentary Portfolio Committee on Public Accounts earlier in September RBZ deputy governor Dr Khuphikile Mlambo said:
“We found ourselves under pressure to act the way we did because of the political dispensation at the time.”
Between 2004 and 2008, the RBZ embarked on massive quasi-fiscal operations, especially funding of the then farm mechanisation programme, among other operations.
But the central bank has continued its quasi-fiscal role.
The RBZ is still operating several support schemes such as the gold, tourism, and cross border facilities.
The export incentive scheme was only ended in 2018.
And Dr Mlambo also told the committee that they were still paying subsidies for fuel to the tune of around US$8 million a month.
“Both fuel and electricity and covered by Treasury Bills (TBs),” he added.
And that’s the least of it.
Official RBZ figures gleaned by Business Weekly shows that in 2017 the central bank issued TBs to the tune of US$378,7 million towards a Government agricultural inputs programme. The document also shows that last year, the bank issued TBs worth US$235,9 million for the same scheme.
And a separate agricultural inputs scheme received TBs valued at US$573,3 million.
Although quasi-fiscal activities are not inherently sinister, they can have negative consequences on the economy, for instance, by excessively increasing money supply thereby driving inflation.
And in Zimbabwe’s case where the funds for the quasi-fiscal activities are raised through a debt instrument – TBs – they can increase Government’s level of indebtedness.
In late September, following the conclusion of the first review of Zimbabwe’s Staff-Monitored Program, the International Monetary Fund (IMF) warned of potential instabilities from quasi-fiscal activities.
“Risks to budget execution are high as demands for further public sector wage increases, quasi-fiscal activities of the RBZ that will need to be absorbed by the central government, and pressure to finance agriculture could push the deficit back into an unsustainable stance,” said head of the mission Gene Leon.
Efforts to get a comment from Finance and Economic Development Minister Mthuli Ncube were fruitless as questions sent to him went unanswered.
All things being equal, experts say the central bank should focus on its lender of last resort role, and instead concentrate on creating a conducive financial services climate that is characterized by efficient banks that offer facilities at reasonable rates to the key economic sectors.
The World Bank, however, says if quasi-fiscal activities cannot be avoided, they should at least be part of the budgeting plan:
“Quasi-fiscal activities are financial transactions undertaken by the central bank or state-owned banks to achieve government policy goals. These operations include interest rate subsidies, support to ailing enterprises and financial institutions, payments of government debt, and financing exchange rate losses made by the government.
“It is generally preferable to accomplish the desired policy objectives through transparent subsidies in the budget rather than quasi-fiscal operations. Moreover, a country’s monetary authorities should concentrate on monetary policy and operations, and not get involved in activities which in effect substitute for fiscal operations through the budget.
“In any case, the quasi-fiscal operations of the central bank and other banking institutions should be scrutinised along with direct government expenditure programmes, and should be shown in the budget documents.
“At a minimum, a statement of the quasi-fiscal activities of the banking sector should be annexed to the budget. The production of transparent accounts from the central bank is also important since estimating the cost of quasi-fiscal operations is not a simple matter.”
Going forward in the terms of the budgetary process, the central Government appears to wants to put its books in order.
“On the expenditure side, Government spending will be contained within sustainable levels, avoiding recourse to Central Bank overdraft facility and expenditures outside the Budget,” said Treasury in its 2020 Pre-Budget Strategy Paper.
The Finance Minister announced the 2020 National Budget earlier this month.
Time will tell whether the Government lives up to its promise.