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Zimbabwe central bank broke and discredited, says IMF
Tsungai Murandu, ZimOnline
May 01, 2007

http://www.zimonline.co.za/Article.aspx?ArticleId=1305

International Monetary Fund (IMF) says Zimbabwe's central bank is technically broke and has tarnished its credibility as the regulator of the country's banking system.

In a Working Paper released on 25 April, the IMF said the Reserve Bank of Zimbabwe (RBZ) was unsound to manage the levers of Zimbabwe's financial industry and would need to be recapitalised to regain the confidence of the banking sector.

"The RBZ is making losses because of the costs involved in supporting government policy through quasi-fiscal activities and keeping the currency overvalued," said the Bretton Woods institution.

While central bank losses in most countries are contained within 10 percent of Gross Domestic Product (GDP), Zimbabwe’s flow of central bank quasi-fiscal losses are estimated to have amounted to 75 percent of GDP in 2006.

The losses have arisen from a range of activities, including monetary operations to mop up liquidity; subsidised credit; foreign exchange losses through subsidised exchange rates for selected government purchases and multiple currency practices; and financial sector restructuring.

Since becoming the country's chief banker in December 2003, RBZ governor Gideon Gono has implemented a dual exchange rate policy, characterised by one rate for official government and other essential transactions and another for ordinary purchases.

The IMF said the dual exchange rate has worked to the disadvantage of the central bank, which has had to scrounge on the illegal foreign exchange market for hard cash for onward selling to parastatals and other "key sectors" at a loss.

The key sectors have included senior politicians and government ministers as well as newly resettled farmers.

The RBZ has also pumped money into collapsed financial institutions under a financial sector restructuring started by Gono in 2004.

The quasi-fiscal losses of the central bank have been financed through money creation or issuance of central bank securities, pushing inflation to 2 200 percent in March.

"These developments have resulted in an unstable macroeconomic environment that risks hyperinflation, reinforcing the argument in favor of far-reaching and simultaneous reforms in the areas of fiscal, monetary, and exchange rate to restore policy credibility and impose macroeconomic discipline," said the IMF.

The Fund noted that the remedy to the current situation was to eliminate the causes of losses by implementing measures to improve the cash-flow of the bank and restore its financial position.

Suggested measures included elimination of quasi-fiscal activities, the restructure of the RBZ functions and activities, and recapitalisation of the central bank to replace the existing non-earning assets with revenue generating resources, the IMF said.

"Moreover, Zimbabwe needs to rationalise the relationship between the central bank and the central government," said the Fund.

The Fund, however, warned that recapitalisation of the central bank would only be best achieved once stability in the economy has been restored.

"When balance sheets have seriously deteriorated as in the case of Zimbabwe, a recapitalisation of the central bank would be recommended once stabilisation has been achieved," the IMF said.

This is not the first time Gono has been criticised for his quasi-fiscal activities. His policy came under fire from Herbert Murerwa in December 2006 when the former finance minister said the quasi-fiscal expenditures by the RBZ were fuelling inflation.

Similar criticism has come from the IMF, which has asked the Zimbabwean authorities to factor the RBZ's off-budget spending into the country's national government.

The RBZ governor - a close confidante of President Robert Mugabe - was last week adamant that he would not stop his off-budget spending and announced further support for farmers in the form of tractors and implements.

He insisted that calls to cut on quasi-fiscal activities were based on ignorance as other countries such as the United States and the European Union were also supporting their farmers.

"The case of Zimbabwe is, therefore, not a unique one, and as monetary authorities, we have absolutely no apology to make for our firm commitment in seeing to it that our farmers are given the necessary support to boost agricultural production as a strategic sector," the RBZ chief said. – ZimOnline

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