In 1780, following the American Revolution, the first federal government of America faced a significant challenge of how to deal with the financial chaos created by the revolution.
The Ritesh Anand Column
The States had accumulated huge war debts and there was runaway inflation. Almost all areas of the economy looked dismal throughout the 1780’s creating a sense of crisis that produced a stronger central government under the new constitution.
George Washington, the first United States President chose the talented Alexander Hamilton, who had served him throughout the revolutionary war, to take on the challenge of directing federal economic policy as the treasury secretary.
The first issue that Hamilton tackled as Washington’s first Secretary of the Treasury concerned the problem of public debt. Governments at all levels had taken on so much debt during the revolution. The commitment to pay them back was not taken very seriously. By the late 1780s, the value of such public securities had plunged to a small fraction of their face value. In other words, state IOU’s — the money borrowed to finance the revolution — were viewed as nearly worthless.
Hamilton issued a bold proposal. The federal government should pay off all Confederation (State) debts at full value. Such action would dramatically enhance the legitimacy of the new central government.
To raise money to pay off the debts, Hamilton would issue new securities (bonds). Investors who had purchased these public securities could make enormous profits when the time came for the US to pay off these new debts.
Hamilton’s vision for reshaping the American economy included a federal charter for a national financial institution. He proposed a Bank of the United States. Modelled along the lines of the Bank of England, a central bank would help make the new nation’s economy dynamic through a more stable paper currency.
Hamilton was instrumental in navigating the US economy through extremely challenging times. It’s for this reason that his picture appears on the US$10 bill.
In many respects Zimbabwe’s economy is in a very similar situation to the US in the 1780s. The economy is in poor shape and much of the outstanding debts accumulated during the period of hyperinflation have not been settled.
This includes sovereign debt estimated at US$10 billion, and the Reserve Bank of Zimbabwe (RBZ) debt of circa US$1,2 billion. The RBZ Debt Assumption Bill proposes that the Government of Zimbabwe assumes the debt of the RBZ. Why is this important and how does it affect the average Zimbabwean? The RBZ plays a crucial role in providing stability and credibility to financial markets in Zimbabwe.
Given the outstanding debt the RBZ can no longer play the role of lender of last resort. It is imperative that the RBZ cleans up it’s own balance sheet in order to have credibility in both domestically and internationally.
The RBZ Debt Assumption Bill is a noble attempt by the government of Zimbabwe to clean up the balance sheet of the RBZ and allow it to function like a normal central bank. It assumes responsibility for past mistakes and allows the country to move forward.
Combined with the establishment of Zamco to acquire Non-Performing Loans (NPL’s) from ailing banks will serve to strengthen the financial sector in Zimbabwe.
One could easily argue why taxpayers should ultimately bear the burden of these debts when so many people did not benefit from these loans.
However, during the period of hyperinflation the RBZ assumed the role of government in supporting the economy through “quasi-fiscal” activities.
These actions were undertaken in the best interests of the country. Therefore, while many people did not directly benefit from the loans the activities supported the economy in the absence of any foreign direct investment.
One could question the intentions behind the actions and argue that they were not necessarily in the best interest of the country. The key issue is that today the RBZ is straddled with this debt and unless and until it can be resolved the RBZ cannot perform the normal duties of a central bank. It’s that simple.
There are a couple of issues that need to be carefully considered with the bill.
Clause 2 Debt Management Office:
- There is need for clearly defined roles and responsibilities?
- Transparency and accountability in the validation and reconciliation of RBZ debts?
- Independence from political and commercial interference?
- Quarterly or bi annual reporting?
Clause 3: “Prior Debt” 31 December 2008:
- Who benefited from these loans?
- Did the RBZ act in the best interests of the country as a whole?
- How much of these loans can be recovered and how best can this be achieved?
- Clause 4: Ministry of Finance sole responsibility for discharge of outstanding obligations:
- Too much power vested in one individual?
Violation of the constitution — Section 298 (Principles of Public Accountability) and Section 299 (Parliamentary Oversight of State revenues and Expenditures)
There is need for greater debate and discussion with civil society on the RBZ Debt Assumption Bill. There needs to be much greater understanding and appreciation of the challenges facing the country. We need to bear in mind that this is a painful process, very similar to the austerity measures adopted by many European countries as well as the US post the financial crisis in 2008.
Zimbabwe needs to find a holistic approach to resolving its debt issues, we cannot look at our debts in isolation. A more systematic approach should be considered to deal with all debts. Combined with this, there is need for Zimbabwe to restore relations with its creditors, regain investor confidence and a financial re-engagement with the international community for debt resolution to be practical. There is need for greater transparency and accountability in natural resources governance.
Finally, there is need for restoring macroeconomic growth and stability. This is critical to the long-term success of Zimbabwe. The RBZ Debt Assumption Bill is a noble attempt by government to ensure financial market stability and restore credibility to the RBZ.
RBZ plays a critical role in providing confidence and stability to the financial sector as a lender of last resort. Like the actions of Hamilton, Zimbabwe needs to take swift and decisive action in order to restore confidence in financial markets and the economy.