AS Reserve Bank of Zimbabwe governor Gideon Gono sat in the public gallery, chin in hand, listening to Finance minister Herbert Murerwa’s attack on
his failed monetary policies, a whirlwind of thoughts must have shot through his mind.
In a major turn of events that could derail Gono’s ongoing experiments with the economy, Murerwa finally woke up last week and demanded back the powers wrestled from his ministry by Gono.
Murerwa’s body language spoke of a man fed up with the ruinous actions of his defiant subordinate.
There have been cold wars in the corridors of the Ministry of Finance and the RBZ over Gono’s funding of public and private sector projects outside national budgets.
The RBZ governor had until last week literally taken over the role of the ministry in a development that has been criticised by industry, commerce and some in government.
One journalist asked Gono: “Does Zimbabwe need a Minister of Finance?” to which he retorted that ancient textbook economics did not work in Zimbabwe’s rapidly deteriorating economy.
While presenting the 2007 budget last week, Murerwa came out blazing, attacking unplanned expenditure and the central bank’s quasi-fiscal activities in the economy.
“Consistent with our constitution and the Audit and Exchequer Act, beginning 2007, all such and any other additional public expenditures will be strictly and adequately reflected through the budgetary process,” he said.
“Such quasi-fiscal expenditures had risen to levels that are now undermining our turnaround efforts by increasing the growth of money supply and therefore fuelling inflation,” Murerwa said.
Economic analysts say money supply growth contributes over 30% of core inflation.
Money supply growth has escalated to over 400% against an average output of between 0 and 5% as a result of the RBZ’s quasi-fiscal operations, but Gono has ignored advice, pumping in $2,7 billion in 2004 through the Productive Sector Facility.
He purchased agricultural equipment, inputs, funded dam construction projects, channelled billions into small enterprises, infrastructure and many others.
The quasi-fiscal expenditures reached $372,9 billion last year. Incorporating these unplanned expenditures into the 2006 budget increased the overall budget expenditures to $824 billion from $451 billion.
This was against projected revenue inflows of $250 billion. The budget deficit had ballooned, Murerwa argued last week, from 18% to 43% of GDP.
This is too big a deficit for an economy in crisis to manage. Economists said budget deficits must not exceed 5% of GDP.
Gono has his own supporters though who argue that given the continued shrinkage of the tax base as a result of massive industrial closures, employment losses and low disposable incomes, Murerwa would not collect enough revenue to finance the budget.
Independent economist John Robertson said Gono’s quasi-fiscal operations began after realisation that government’s purse was empty.
“It was a brave statement which might not be possible to accomplish,” Robertson said this week of Murerwa’s announcement.
“The reason why Gono had introduced the quasi-fiscal operations was the lack of finance. To some extent, it would be necessary that he is allowed to continue,” he said.
Quasi-fiscal allocations to parastatals and local authorities alone had gobbled $17,8 billion by November with no corresponding increase in output as envisaged by Gono.
University of Zimbabwe Graduate School of Management lecturer Isaac Kwesu said the response by the productive sectors was slow.
When Gono arrived at the RBZ in December 2003 he promised to reduce inflation — then around 600% — to two-digit figures by the end of 2005. But inflation has surged to its worst levels, ending October at 1 070%.
Gono has in recent months focused on funding the productive sectors.
This has outraged the International Monetary Fund (IMF) that warned this would escalate the economic crisis.
“The approach we have taken to the economic turnaround programme is not the textbook type. What we are trying to do is to be practical and relevant to the situation,” Gono told New African magazine last year.
“We are taking a holistic approach… and please do not just focus on the Finance minister, the central bank is now dealing with agricultural issues, communication issues, therefore it is only the mischievous mind which wants to divide the governor from the constituent parts of the economy,” he argued.
However, the results have been catastrophic and the taxpayer has borne the brunt of price distortions, high interest rates and the quasi-fiscal operations.
In most cases, the quasi-fiscal expenditures did not achieve the desired supply response owing to the abuse of availed facilities by most beneficiaries as a result of weak control measures.
Kwesu said last week’s phasing out of quasi-fiscal expenditures from the RBZ was the best announcement by Murerwa in his budget statement.
“We were worried that the hyperinflation the country is facing was instigated by Gono’s quasi-fiscal operations,” he said this week.
“It was good to see authorities finally realising how quasi-fiscal expenditures had undermined our turnaround efforts by increasing levels of money supply growth, thereby fuelling the budget deficits and money printing,” Kwesu said.
“Whilst I recognise that money supply is not always inflationary, it becomes inflationary if its growth is greater than output. A deficit has to be financed and this means in the absence of foreign lines of credit, we have to borrow from the local market or print money.
“But printed money is not income, the majority of people confuse this, including the governor,” Kwesu added.
Gono’s inner circle at the RBZ said Gono does not easily give up and could take his case to the president to justify his actions.
“Adamburwa musweka murume uyu (his tail has finally been cut), but he does not give up easily. However, he could be losing now because if you see the minister making an announcement it means the matter has been discussed at length and his bosses are not happy with him,” said an RBZ official.
But Gono has previously made critical decisions without consulting his principals at the Ministry of Finance.
In August, he implemented radical changes to the currency which were aimed at combating vice and currency externalisation.
He brought in new bearer cheques without consulting Murerwa.
This week analysts said Gono could easily convince Mugabe that Murerwa’s moves were militating against a project whose results would turn around the economy.
On Saturday he announced the postponement of his monetary policy review, originally scheduled for yesterday, to January 2007 in what observers thought was a result of Murerwa’s directive which had forced him to readjust the policy to reflect the new requirements.
“He has no option,” said Kwesu.