World Bank Advises RBZ To End Quasi-fiscal Operations
The World Bank has advised the Reserve Bank of Zimbabwe (RBZ) to cease all quasi-fiscal operations (QFOs) and unbudgeted expenditures
Local economists say unbudgeted spending will push inflation and the exchange rate.
As reported by Business Times, the World Bank recently advised RBZ to transfer US$3.6 billion of its total external liabilities to the Treasury as soon as possible, since it had only transferred US$1.8 billion. The World Bank said:
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.
To ensure price stability and budget transparency, it is critical that RBZ completes the 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].
The Bretton Woods institution also urged the central bank to end the foreign currency retention threshold, claiming that it encourages RBZ to continue participating in QFOs. It said:
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.
Economic analyst Victor Boroma told Business Times that the RBZ’s QFOs are the primary reason for local currency instability. He said:
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%.
The following are some of the activities the central bank engages in or at some point engages 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.
Another economist Tony Hawkins, told Business Times that the RBZ is funding and subsidising many initiatives. He said:
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.
A 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.
In 2019, the RBZ Governor, John Mangudya denied that the Central Bank was involved in any quasi-fiscal activities.
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