Rein in fiscal indiscipline

Reassuringly decent but also nerve-rackingly scary. This is how I describe the monetary policy statement presented by Reserve Bank of Zimbabwe (RBZ) governor John Mangudya on Wednesday.

Editor’s Memo,Brezhnev Malaba
bmalaba@zimind.co.zw

Although he outlined a correct diagnosis of the malady afflicting the economy, he then failed to prescribe the requisite medicine. How long can the patient live?

Let us start with the scary part. For the first time in recent memory, the authorities have decided to reveal to the nation the full extent of the Treasury Bill (TB) fiasco, which constitutes some of the most glaring evidence of economic mismanagement.

The government’s over-reliance on the issuance of TBs and bonds has seen a sharp rise in the overdraft facility at the central bank from US$3,2 billion in 2016 to US$5,2 billion in 2017. The government is living beyond its means. There is no better definition of fiscal indiscipline.

In recent months, Zimbabweans have suffered the effects of inflation. Prices, particularly of basic commodities, have shot up significantly, piling the misery on consumers who are at the receiving end of a triple whammy of extortionate prices, poor service delivery and a long-running cash shortage.

The government’s appetite for unrestrained spending is crowding out the private sector, and this feeds into the massive distortions in the economy.

By exceeding the RBZ overdraft limit by US$400 million, government officials are showing that they are paying lip service to fiscal reform.

The sad reality is that the government’s expenditure demons are unlikely to be exorcised anytime soon. This, after all, is election year. Zanu PF has no history of embracing austerity when its hold on power is at stake. Populism reigns supreme over economic pragmatism.

Apart from election-related expenditure, there is Command Agriculture to reckon with as well as maize purchases which the state must finance through borrowings. This will exert more pressure on the public purse.

Talking of maize, the commodity is mired in a scandal that refuses to go away, years after the media exposed it. Corrupt chaps are selling maize to the Grain Marketing Board (GMB) at US$390 per tonne. They go back to the parastatal to buy the same grain for US$240.

The arbitrage opportunity incentivises the wheeler-dealers to sell grain to the GMB this week, buy the same grain from the GMB next week and make a huge killing. At the taxpayer’s expense.

Another scary revelation from the monetary policy statement is that banking sector net profitability has increased from US$181,06 million in 2016 to US$241,94 million in 2017.

What we are not being told about these super profits is that the banks are scandalously profiteering from TBs and fleecing clients through inflated transaction fees.

In this era of quick-win imperatives, the government has a responsibility to conduct public affairs in a responsible manner. I will outline three potential remedies.

Firstly, the growth in broad money supply must be stemmed without further delay. If this is not done promptly, the dangers of rampant inflation are too ghastly to contemplate.

There is enough empirical evidence showing that inflation is grossly understated in this country, but even when the authorities downplay the true extent of this monster, nothing will cushion the public from the disastrous effects of inflated prices.

Secondly, economic policy—in both its fiscal and monetary manifestations—should be implemented in a manner that stimulates export-oriented production. There is no denying the efficacy of current economic policy in boosting exports. Exports were up 37% to US$3,475 billion in the period January to November 2017, from US$2,540 billion in the previous period of 2016.

Thirdly, there is an urgent need to eliminate distortions arising from the discrepancies between official and parallel exchange rates on the foreign currency market. Zimbabwe cannot afford currency volatility and its attendant arbitrage headaches.

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