HomeOpinionErich Bloch: Give Bonds Prescribed Asset status

Erich Bloch: Give Bonds Prescribed Asset status

LAST week the Reserve Bank of Zimbabwe (RBZ) announced that the Special Tradable Gold Bonds, which were due to mature on Monday this week, are to be “rolled over” for a further  six months. 

That announcement was not of great surprise to the holders of the bonds for it has been widely-known for an extended period of time that RBZ is in financial problems. Nevertheless, the failure to redeem the bonds on time is tragic, with cataclysmic consequences.

The RBZ has been the victim of immense financial constraints for some years. Many attribute its apparently near-bankruptcy to gross mismanagement and self-motivated profligacy.

 

That they have such a perception is readily understandable, for there is a pronounced awareness of the immense magnitude of largesse funded by RBZ, ranging from the funding of numerous motor vehicles, vast quantities of tractors, ploughs and diverse other farm equipment and inputs for the agricultural sector and to much else. Although, for having the view that primary culpability is not with the RBZ, this columnist will (without legitimate foundation!) be accused of being an RBZ apologist, nevertheless that view persists.  The reality is that the fault, very substantially and unequivocally, is that of the Zanu PF government.

Year after year, preceding the negotiation of the Global Political Agreement (GPA), that government endlessly demanded, with great intensity, that RBZ engage in innumerable quasi-fiscal operations. Desperate to retain its grip on power, and recognising that the ongoing intensive economic collapse which it had occasioned (despite speciously and spuriously attributing blame for that collapse to others) could weaken that grip on power, it vigorously sought to beneficiate a distraught populace in order to retain the support of the electorate.

However, it did not have the resources to do so, having progressively bankrupted the fiscus, accumulating a national debt in excess of US$5 billion, including more than US$2 billion of pronounced debt-servicing arrears. Therefore, in pursuit of its endeavours to retain electoral support, it recurrently imposed upon RBZ to incur the expenditures.

Such quasi-fiscal operations are anathema to any central bank, and most of the world’s central banks are vested with the autonomy to resist any pressures to engage in such operations, be such pressures applied by government, by the populace, or others.

 

However, despite repeated appeals for such autonomy, the RBZ was not accorded that autonomy, and the Zanu PF government exploited its grip on the RBZ by incessantly driving it into those untoward quasi-fiscal activities. Amongst the many consequences, including being a major contributant to extreme hyperinflation, was that the RBZ’s reserves were grievously eroded, and that it was not only unable to service its expenditures and debts timeously, but also that it recurrently withheld foreign exchange due to private sector enterprises (during the pre-demonetisation of Zimbabwean currency period).  Amongst the many unserviced debts were those of RBZ’s subsidiary, Fidelity Printers & Refiners (Pvt) Ltd. Those debts included considerable amounts due to gold producers for gold deliveries to Fidelity, to whom delivery was mandatorily required by the prevailing legislation, preceding the 2009 issue of gold dealers’ licences to a few producers.

Unable to service those debts, the RBZ issued 12 months, special tradable gold bonds, with an eight percent per annum coupon. This hit hard gold producers, who initially needed payment to service ongoing operational cash flow needs, as well as to fund development and increased productive capacity expenditure.  Some were able to convert the bonds to cash by trading them within the money market, but demand was limited, and the trade discount very considerable, motivating many to retain the bonds, notwithstanding their cash flow constraints. They fervently hoped that redemption would be effected when due, belatedly enhancing their cash flows, but that was not to be.

In announcing the “roll over” of the bonds, the RBZ stated that it was vigorously pursuing various avenues to raise the required funding, and was also engaging in substantive discussions with the Finance ministry to resolve the payment crisis. This is commendable, but in reality the prospects of the RBZ accessing external funds are minimal, until the GPA is fully implemented, albeit very belatedly. Although there is very extensive international willingness, in principle, to accord Zimbabwe lines of credit, there is a major reluctance to convert that willingness into action until such time as there is irrefutable evidence of genuine and extensive progress towards Zimbabwe political stability. The untenably prolonged delays in transforming the totality of the GPA from declarations of intent to actuality are pronounced constraints upon international funding being forthcoming.

The inability of the RBZ to service its obligations was intensified by the contemptuously minimal capitalisation of the bank accorded by government in the 2010 Budget, being a niggardly US$10 million. To all intents and purposes the impecunious circumstance of the RBZ is attributable to government, by virtue of the debt imposition created by the Zanu PF government. The Finance ministry must recognise its moral, and impliedly legal, obligation, to fund the RBZ satisfactorily, either by direct provision of sufficient funds, or by a partial privatisation of the central bank.

It must also do so in recognition of the very negative economic consequences of the RBZ default. On the one hand, the non-availability of the funds is tragically retarding the viability of operations of gold producers, and on the other hand is markedly restraining the development and growth of gold production. This adversely impacts upon national export earnings, upon levels of employment, upon downstream expenditures into the economy, and upon fiscal inflows. Concurrently, Zimbabwe’s poor international credit rating is further worsened, which is a deterrent to much-needed lines of credit being forthcoming, and to critically necessary investment, which is a prerequisite for Zimbabwean economic recovery and growth.

Merely as a transitional, very short-term alleviating measure, the Finance ministry should immediately accord the bonds prescribed asset status, rendering them a somewhat more attractive investment status for insurance companies, pension funds, and other relevant institutions. This would enhance tradability of the bonds, thereby improving gold producers access to desperately needed funds.

 

The bonds should also be classified as acceptable instruments for settlement to Zimra of gold producers’ income tax, PAYE, VAT, witholding taxes, and other tax liabilities. Every effort must be speedily taken by government to minimise the tragic consequences of the non-redemption by RBZ of the bonds when due.

Eric Bloch

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