RBZ bill creates massive debt for all Zimbabweans

Reserve Bank of Zimbabwe (Debt Assumption) Bill last week sailed through the National Assembly, taking the bill a step closer to becoming law.

The bill provides for settlement by the state of "certain liabilities" incurred by the RBZ prior to December 2011. A total of $1,3 billion validated debts stand to be assumed by the government as an exit strategy to reverse the RBZ's burden on its "extraordinary" quasi-fiscal operations of the early 2000s. These debts may be liquidated through issuance of treasury bills or any other government issued paper.

The assumption of the validated claims will free the RBZ from creditors' legal action.  Most of the creditors listed in the bill are largely corporate creditors' foreign currency balances. The bill specifies that no action or proceedings shall be initiated against the RBZ in respect of any debt and related claims to be assumed by the government.

The RBZ raked up this debt through its quasi-fiscal activities which fuelled hyperinflation in the process. The country was alienated from the international community and the RBZ implemented "interventions under extraordinary circumstances" by providing concessional funding to try revive the fortunes of the country. These operations were quasi-fiscal because they did not conform to the traditional mandate of the central bank of directing monetary policy, which is used to stabilise prices and value of the currency. Central banks achieve their mandates by managing the interest rate policy and through open market operations, which control the level of liquidity in the financial system.

These quasi-fiscal activities included the roll out of initiatives and programmes that included the Productive Sector Finance Facility (PSFF), the Troubled Bank Fund (2004), the Parastatals and Local Authorities Re-orientation Programme (Plarp), Agriculture Sector Productivity Enhancement Facility (Aspef), Agricultural Mechanisation Programme, and the Basic Commodities Supply Side Intervention (Bacossi).

Aspef (2005) provided selected farmers with capital and working capital finance for agriculture and related activities at concessional interest rates. Plarp (2005) was implemented to reform parastatals and local authorities to enhance their contribution to national economic turnaround, which resulted in the RBZ placing money into loss-making state-owned companies.

Bacossi (2007) sought to support the supply of affordable basic goods. For these and other interventions, the RBZ pumped in a lot of monetary resources into sectors such as agriculture, local authorities, state-owned enterprises and water. The end result — rapid money supply growth and hyperinflation, and the rest as they say, is history. While there is no doubt that these were desperate times and some might even argue that they called for desperate measures, it is now clear that some value destruction occurred through some of these policies and programmes with the end result being that the RBZ debt assumption is borne by all Zimbabweans. Most of these activities could and should have been implemented by the fiscal authorities within available means without providing the central bank, whose mandate is to control liquidity and maintain the value of the local currency, a licence to effectively annex creditors' funds.

The proposed debt assumption comes in at a time when the government is battling with a public debt burden. Statistics per the 2015 national budget show government total debt level of $8,4 billion, which represents 60% of the country's GDP.

Paying off the debt is largely a political decision. But who bears the cost of paying off the debt? Some have argued that maybe government workers through lower pay and benefits, or the general populace through poor service delivery or taxpayers through higher taxes and fees. Practically, the debt burden can be reduced through running budget surpluses, lower budget deficits or through inflation. In this regard, we have seen the government scrambling to find new revenue sources, even considering imposing taxes on the resettled farmers, supposedly the beneficiaries of some of the RBZ's quasi-fiscal spend. This task, however, is likely to be made difficult by the low levels of productivity on some of these farms and local economy in general.

Australia reduced its early 1900s debt burden which was above 100% of GDP for most of the first half of the last century by substitution of external for domestic debt and through a few periods of high inflation. Its current debt-to-GDP ratio is now below 10%. Canada put back its public finances in order by cutting government expenditure in the 1990s, which took care of its debt crisis.  France "resolved" its 1915-1945 debt crisis through what is known as an "inflationary default", letting high inflation wipe away the value of debt providers. Germany inflated its way out of its World War debts through hyperinflation and used a currency conversion from military Marks to Deutschemarks to effectively wipe away its debt burden.

The plausibility of these options for Zimbabwe given the current state is hard to conceive. The economy is struggling to get back on its feet, hence the prospect for a budget surplus in the short term is inconceivable.  Reverting to a local currency and inflating out of the debt will be a dangerous option to even consider. What the assumption of debt will effectively achieve is to set a platform for higher taxes and fees or it will effectively front load the debt burden to the country's future generations.

What we learn from this is that it will be useful in future that the monetary authority focus on the monetary policy as engaging in quasi-fiscal activities may impair the central bank's core role of price stability and subsequently create a debt burden that all the citizens will carry. Ideally, the central bank should perform its role in an independent manner.
 
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Nesbert Ruwo (CFA) and Jotham Makarudze (CFA) are investment professionals based in South Africa. They can be contacted on media@opportunvest.co.za