THE International Monetary Fund (IMF), in its recent Article IV report, raised a number of concerns on how Zimbabwe is managing its economic and financial affairs.
The Brett Chulu Column
The IMF raised serious concern on transparency gaps in a number of areas spanning unreported transactions and information dissemination.
Of concern to the IMF is the issue of quasi-fiscal activities carried out by the Reserve Bank of Zimbabwe (RBZ).
At one point, in the early years of the tenure of the current RBZ governor, John Mangudya, the central bank went into an academic argument that the activities of funding government operations did not meet the definition of quasi-fiscal activities.
The definition of quasi-fiscal activities underscores the chief criterion. For an activity to be classified as quasi-fiscal, the activity must be supplied by a central bank or state-related enterprises at sub-economic prices, representing a hidden expenditure (unfiscalised) to the government.
In the case of the current Article IV report, there is no scope for the RBZ to take refuge in academic nuances; the gold incentive scheme is a big culprit. The gold incentive scheme was meant to entice the small-scale gold miners who contribute 60% of the gold output to sell to approved gold dealers. The gold incentive costs, if they continue for the rest of the fiscal year, would constitute 1% of gross domestic product (GDP).
This very significant cost would not be reported in the budget. It gives an impression that the government is managing its budget better than it is yet, in fact, the true picture is that of both unstated and understated government expenditures. The gold incentive scheme, which began in September 2019, is known to be highly correlated with spikes in the parallel forex market rate.
It is disturbing to note that the central bank rubbished a report by the Financial Times that mentioned, a day after the IMF visit, that the matter of the gold incentive scheme fuelling currency instability had been brought up for discussion. It is now very clear that this matter was central to the discussions with the IMF, showing that the denial by the central bank was without basis.
The IMF mentioned that the RBZ promised to stop the gold incentive scheme. The IMF recommended that the forex market be fully liberalised so that parallel forex market premium is reduced or eliminated, encouraging gold producers to sell their gold Fidelity Printers (official gold purchaser).
The IMF warned the authorities not to introduce subsidies given to selected entities at preferential below-market-priced forex allocations as had been the case with fuel and electricity. The IMF advised the authorities that all subsidies be reported in the budget so that a true and accurate picture of budget performance is given.
The IMF bemoaned the practice of disseminating monetary statistics late. The authorities were advised to report frequently and timeously as part of efforts to build a culture of transparency, fostering the restoration of market confidence. It was noted that the RBZ balance sheet data and monetary statistics are published with long time lags. The IMF recommended that the RBZ publish its balance daily balance sheet data within one week (from the reference date) and monetary statistics within four weeks.
Governance, independence gaps
A number of governance and independence issues were raised by the IMF.
First, the IMF noted that many government transactions occurred outside the Public Finance Management System (automated) and outside the instruction of the Treasury.
Second, there is a concern that though Treasury is publishing monthly budget execution reports, there are no reports on expenditures done outside the budget and on state-owned entities, creating governance vulnerabilities.
Third, the IMF rates the quality of internal controls and internal audits in ministries, departments and government agencies as weak, creating a fertile environment for corruption and financial irregularities. The IMF noted that in several instances the Finance Ministry itself as well as other line ministries have not complied with legal requirements.
Fourth, the IMF noted that there are 26 uncoordinated government agencies at 18 border posts, creating opportunities for disorder and fraudulent transactions.
Fifth, in terms of state-owned enterprises (SOE), four critical governance gaps were identified. The nomination of members to the boards of SOEs is not yet in line with the Public Enterprises Corporate Governance Act. The publishing of annual financial statements and reports by SOEs is not yet standard practice — SOEs largely remain unaccountable bodies.
The Public Finance Management Act requires SOEs to submit quarterly and annual reports to the Finance Ministry; the majority of SOEs are not complying and there has neither been censure no consequences for non-compliance. The inter-ministerial coordination of the privatisation of 25 SOEs remains unclear, creating rent-seeking opportunities, the IMF warns.
Sixth, in terms of the RBZ, several concerns were noted. The central bank’s mandate is said to be convoluted and not in line with international standards. The RBZ’s broad discretion in applying forex regulations carries with its governance vulnerabilities; opaque forex allocations and instructing authorised dealers to transfer legacy debts to the RBZ are examples cited. The IMF raised the point that there is an over-concentration of power at the executive level of the RBZ. The Audit and Oversight Committee of the RBZ is not in line with accepted practices in terms of independence and experience of the members. Codes of Conduct, in terms of disclosure of information, in relation to conflicts of interest is required for RBZ managerial layer, but not the governor, deputy governors and board members. The Zimbabwe Asset management Corporation has no specific provisions that apply to it to delimit its powers and governance.
The RBZ Act allows for undue influence from the political authorities, compromising on the independence of the RBZ. The Finance Ministry is allowed by the RBZ Act to be involved in final decision-making and the authority to reverse certain decisions. In short, governance reforms must also target the modernisation of the RBZ Act to give the central bank effective independence.
The issues of low transparency and weak governance in the entire government edifice and its agencies indicate that the negative behavioural forces working against economic reform are very strong.
Unless there is a decisive move to tame these negative behaviours, the aspirations to turn around the economy will remain just that.
Strategy is not the lofty goals; it is the everyday actions made in terms of resource allocation — the late Clayton Christensen taught us. The effective economic strategy is not the Transitional Stabilisation Programme — it is the misaligned decisions made by ministries, departments and agencies.
The IMF bemoaned the fact that the RBZ Act makes it difficult for the RBZ to be independent.
Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — email@example.com.