## 1. Transparent transfer of quasi-fiscal activities to the government budget, as

## Source details

**Canonical URL:** [1. Transparent transfer of quasi-fiscal activities to the government budget, as](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp0799.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp0799.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp0799.pdf.json)

---

### Purpose and core requirement
- No entity outside the budget should undertake any activity of a fiscal nature (including interest payments, subsidized credits, etc.) without offsetting transfers transparently provided for in the budget.
- Any QFAs carried out through the RBZ, FISCORP, the Industrial Development Bank of Zimbabwe or any other public entity should be covered via budgetary transfers.
- Objective: increase transparency and accountability and strengthen fiscal governance by subjecting actions of a fiscal nature to normal budgetary scrutiny and procedures.
- Clarification: transfer new flows of activity previously done by the RBZ (or any other such entity); do not require immediate absorption of the stock of past losses. Unrealized exchange losses can remain on the RBZ balance sheet until recapitalization following stabilization.

### Required fiscal tightening and composition of adjustment
- Estimated adjustment needed:
  - A reduction of at least 10 percentage points of GDP in the adjusted primary balance (including the newly-absorbed QFAs) relative to the outcome in 2006 would be needed to lower inflation by about 800 percentage points.
- Rationale:
  - A tightening of this order of magnitude or more would be in line with large fiscal adjustments made by other countries.
- Potential measures to achieve tightening:
  - Reduction in the government wage bill (wage bill levels noted as large by regional standards and possibly reflecting excessive employment).
  - Cuts in capital expenditure (capital expenditure more than doubled in real terms in 2006).
  - Cuts in (former) QFAs, particularly subsidies to public enterprises.
- Fiscal context and magnitudes (percent of GDP):
  - Government revenue ratios: 33.8 in 2004; 43.7 in 2005; 51.3 in 2006.
  - Government expenditure: 41.5 in 2004; 49.6 in 2005; 58.6 in 2006.
  - Wage bill: 15.3 in 2004; 18.1 in 2005; 17.1 in 2006.
  - Official overall balance (including grants, excluding interest arrears): -4.7 in 2004; -3.1 in 2005; -5.4 in 2006.
  - Official primary balance: -1.7 in 2004; 3.7 in 2005; 2.3 in 2006.
  - Adjusted primary balance (including RBZ QFAs): -26.9 in 2004; -17.2 in 2005; -24.7 in 2006.
  - Adjusted financing requirement: -29.9 in 2004; -64.3 in 2005; -80.3 in 2006.
  - Adjusted primary expenditure is estimated to have amounted to some 75 percent of GDP in 2006, of which non-interest QFAs of the RBZ amounted to some 27 percent of GDP.
- Complementary policy:
  - Price and exchange rate liberalization would be needed to ensure that QFAs are durably reduced.
- Social priorities within a tighter envelope:
  - Ensure food security.
  - Rehabilitate collapsing health infrastructure.
  - Provide a targeted social safety net to protect vulnerable groups, including those affected by HIV/AIDS and “Operation Murambatsvina”.
  - U.N. estimates related to Operation Murambatsvina: some 700,000 people lost their home or source of livelihood, or both, and a further 2.4 million people were indirectly affected in varying degrees.

### Exchange regime, prices, and monetary framework (linked to QFA transfer)
- Exchange regime liberalization:
  - Unify the exchange rate and remove restrictions on current international payments and transfers.
  - Immediate action: substantially devalue the interbank exchange rate promptly and eliminate all multiple exchange rates.
  - Subsequent sequencing: depreciate the interbank rate steadily toward the parallel market rate (which would appreciate as fiscal and monetary policies are tightened); once convergence occurs, float the unified exchange rate.
- Price deregulation and hard budget constraints on public enterprises:
  - Impose hard budget constraints requiring public enterprises to cut costs and operate at preset levels of budget subsidies and agreed pricing formulas.
  - Deregulate prices and allow public enterprises to introduce cost-recovery pricing to move them to a commercial footing.
  - Anticipated effect: a one-off spike in prices is likely, but strong fiscal adjustment would ultimately reduce inflation pressures.
- Monetary framework and anchor:
  - After exchange rate unification and RBZ disengagement from QFAs, establish a broad money anchor with a flexible exchange regime, using reserve money as the operational target.
  - Rationale: an exchange rate anchor would be difficult because international reserves are low.
  - Interest rates need to be gradually moved to market-determined levels to ensure monetary policy effectiveness and reduce liquidity risks in the banking system.

### Governance, structural reforms, and recovery prospects
- Structural and governance priorities needed to sustain stabilization:
  - Public enterprise reform.
  - Civil service reform to sustain a real reduction in the government wage bill.
  - Expenditure management and tax reform.
  - Central bank reform and recapitalization.
  - Land and agriculture reform, addressing unresolved property rights issues related to land tenure and limits of recent 99-year leases.
  - Protect private property rights and increase policy predictability to restore investor confidence.
- Recovery prospects based on cross-country evidence:
  - Very high inflation is usually accompanied by sharp output contraction; in successful stabilizations output often recovers quickly—usually within the first year or two.
  - Zimbabwe may see an initial positive output response if inflation is brought down rapidly and prices are liberalized, but longer-term recovery hinges on addressing fundamental structural problems and land tenure issues.

### Role of external support in implementing QFA transfer and stabilization
- Lack of external financing is a constraint but not a reason to delay stabilization.
- Evidence from 30 cases (1980–2005):
  - Inflation had fallen by more than 600 percentage points 12 months after the peak in all 30 cases.
  - More than a third (12 cases) had official external financing at levels comparable to Zimbabwe (less than 4 percent of GDP) and had no Fund arrangement in the main year of disinflation.
  - Many cases benefited from nonfinancial external support (policy advice, technical assistance).
- Implications for Zimbabwe:
  - Strengthening relations with donors and mobilizing external financing would ease the burden of initial adjustment and provide room to address social dislocation from public sector downsizing.
  - External policy advice and technical support would be essential to implement a broad-based stabilization package.
  - If a credible stabilization package is implemented upfront and followed by reforms, Zimbabwe is likely to attract significant private capital inflows over the medium term.

### Summary recommendation (as part of the initial stabilization package)
- Immediate, transparent transfer of all quasi-fiscal activities to the government budget, combined with:
  - Strong fiscal adjustment that includes newly-absorbed QFAs (targeting at least a 10 percentage point of GDP improvement in the adjusted primary balance relative to 2006 to lower inflation by about 800 percentage points).
  - Exchange rate unification and liberalization of current international payments and transfers.
  - Liberalization of price controls and imposition of hard budget constraints on public enterprises.
  - Implementation of a strong monetary anchor once QFAs are eliminated from the central bank’s operations.

*Source: IMF Working Paper _wp0799 - 1. Transparent transfer of quasi-fiscal activities to the government budget, as*

### References..............................................................................................................

### _wp0799 - References

### I. INTRODUCTION
- Hyperinflations are largely modern and rare, typically associated with printing money to finance large fiscal deficits due to wars, revolutions, the end of empires, and the establishment of new states.
- Cagan’s (1956) definition: hyperinflation begins in the month inflation first exceeds 50 percent (per month) and ends in the month before the monthly inflation rate drops below 50 percent for at least a year.
- Historical counts:
  - Eight hyperinflations during 1920–1946.
  - None between 1947–1984.
  - Fifteen hyperinflation cases since 1984.
- For alignment with Zimbabwe’s situation, the paper uses a 12-month inflation rate of 1,000 percent (rather than Cagan’s strict hyperinflation definition) as the threshold for “very high inflation.”
- Official CPI in Zimbabwe likely understates inflation because:
  - About a third of the basket reflects price-controlled items.
  - Consumption weights are outdated.
  - Some private sector estimates placed annual inflation closer to 3,000 percent in February 2007.
  - Informal private indices (more heavily weighted by food) have had monthly inflation rates exceeding 50 percent for several months.
- Key proximate causes of Zimbabwe’s sustained output contraction (real GDP estimated to have declined by about 30 percent since 1999):
  - Chaotic seizure of commercial farms.
  - High and accelerating inflation.
  - Price distortions due to extensive controls and regulation, particularly an overvalued fixed exchange rate by the RBZ.
  - Collapse of investor confidence from unpredictable policies and lack of respect for property rights.
  - Minimal external financing owing to poor relations with creditors and donors and deteriorating economic and social conditions.
- Paper structure:
  - Section II: examines high inflation episodes internationally (1980–2005) and stylized facts.
  - Section III: analyzes reform elements critical for successful stabilization.
  - Section IV: identifies policy actions specific to Zimbabwe.
  - Section V: role of official external financing.
  - Section VI: conclusion.

### II. HIGH INFLATION EPISODES: SOME STYLIZED FACTS
- Sample definition and composition:
  - Uses 12-month inflation rate of 1,000 percent to define high inflation periods.
  - Identified 30 high inflation episodes in 24 countries between 1980 and 2005.
  - Regional composition: 5 Latin American countries, 17 Central and Eastern European / Former Soviet Union (FSU) countries, and 2 African countries.
  - Six countries experienced two high inflation periods: Argentina; Brazil; Democratic Republic of Congo; Macedonia, FYR/SFRY; Nicaragua; and Tajikistan.
- Duration and severity (sample-wide):
  - Median length of high inflation periods exceeded one year, with variation across regions.
  - High inflation periods tended to be shorter in Central and Eastern European countries and the FSU (close to one year), while Latin American economies had a median duration about twice as long.
  - In almost a third of cases inflation exceeded 10,000 percent.
  - In two cases (Democratic Republic of Congo, Nicaragua) inflation exceeded 60,000 percent.
  - Serbia’s monthly peak of 175,093 percent (February 1993–January 1994) is noted but excluded due to lack of data.
- Table 1 (selected aggregate statistics as presented):
  - Number of episodes: 30 total; Central and Eastern Europe/Former Soviet Union: 19; Latin America: 3; Others: 8.
  - Number of countries: 24 total; Central and Eastern Europe/FSU: 17; Latin America: 2; Others: 5.
  - Minimum length (months): Total 2; Central and Eastern Europe/FSU 2; Latin America 3; Others 5.
  - Median length (months): Total 13; Central and Eastern Europe/FSU 11; Latin America 23; Others 20.
  - Max length (months): Total 34; Central and Eastern Europe/FSU 25; Latin America 34; Others 24.
  - Maximum annual inflation rate (percent): Total 91,253; Central and Eastern Europe/FSU 27,020; Latin America 63,776; Others 91,253.
  - Source: IMF International Financial Statistics and World Economic Outlook.
- Stylized facts on stabilization dynamics (Figure 2 summary):
  - In successful stabilization, inflation tends to fall very rapidly and output recovers within the first or second year.
  - Median annual inflation fell from a peak of about 1,600 percent to 180 percent 12 months after the peak.
  - Median GDP growth: during acceleration median output decline slowed from some -7 percent to about -½ percent in the first year of stabilization and achieved positive output growth in the second year.
  - Interpretation: high inflation is highly damaging to output; reducing inflation has a positive effect on output.
- Data sources and notes:
  - Sample includes all countries passing the 1,000 percent threshold for which data are available.
  - Main data: IMF’s International Financial Statistics and World Economic Outlook; external official financing data from World Bank’s World Development Indicator database.
  - Literature references: Baumann (2000); Fischer, Sahay, and Végh (2002); Reinhart and Savastano (2003).

### III. CRITICAL REFORM ELEMENTS AND SEQUENCE
- Methodology:
  - Identified reform sequence using IMF Country Reports by ranking reform areas according to starting time (1 = highest priority started first; 5 = lowest).
  - If one ranking found in more than half the cases, designated “most common”; if distribution more widespread, three most frequent rankings provided.
- Broad reform areas considered: Fiscal/Monetary Stabilization; Institutional Reform; Domestic Price Liberalization; Domestic Financial System; Privatization/Trade Liberalization/Capital Flow measures.
- Core lessons from cross-country analysis and literature:
  a. Broad-based reform agendas were typical of successful stabilizations. Institutional reforms, fiscal stabilization, and price liberalization were often started concurrently to restore confidence and credibility.
  b. Fiscal and monetary tightening was critical:
     - Sharp reduction in fiscal deficit was needed to end very high inflation.
     - Country examples of rapid fiscal adjustment:
       - Nicaragua: adjustment of the primary fiscal deficit was 23 percentage points of GDP within one year.
       - Armenia: adjustment of 9 percentage points of GDP within one year.
       - Bolivia: general government fiscal deficit (excluding quasi-fiscal deficits) declined from 27 percent of GDP to 3 percent in two years.
     - Cross-country study (Tsibouris et al., 2006) covering 165 countries (1971–2001) indicates median tightening of the primary fiscal balance of about 12.5 percentage points of GDP (range 6.3-29.9 percentage points of GDP) in one year.
     - Large upfront fiscal adjustments were most successful in reducing inflation and generally associated with output recovery within one to two years.
  c. Fiscal consolidation must include reduction and elimination of quasi-fiscal activities (QFAs):
     - QFAs often arose because central banks supported loss-making state-owned enterprises or bailed out banks.
     - Examples: Bolivia; Croatia; Macedonia, FYR/SFRY; Angola; Bulgaria.
     - Enforcing hard budget constraints on state-owned enterprises was important to reduce public financing requirements.
  d. Price and exchange regime liberalization was frequently a priority (e.g., Azerbaijan and Bolivia):
     - Liberalization could cause a one-time price level increase but improved resource allocation and stopped subsidization that fueled inflation.
  e. Institutional reforms (rule of law, public sector, central bank, labor market) were often initiated immediately, especially in transition economies (examples: Nicaragua, Peru); these reforms enhanced credibility and investor confidence.
  f. Timing varied across countries for financial system reform, privatization, and trade reform: some initiated these at the start (e.g., Nicaragua, Georgia), others delayed (e.g., Turkmenistan, Ukraine).
- Sequencing summary (Table 2 interpretation):
  - High inflation countries’ most common sequence shows fiscal/monetary stabilization and domestic price liberalization ranked highly and often initiated early; institutional reforms also commonly initiated near the start.

### IV. ACHIEVING MACROECONOMIC STABILIZATION IN ZIMBABWE
- Primary drivers of accelerating inflation in Zimbabwe:
  - High rates of money growth reflecting rising fiscal and quasi-fiscal deficits.
  - RBZ quasi-fiscal losses increased sharply since 2004, mainly due to:
    - Large foreign exchange subsidies to public enterprises and government.
    - Price supports to exporters (to partially compensate them for the highly overvalued exchange rate).
    - Interest payments on open market operations.
  - These quasi-fiscal losses have dwarfed the traditionally measured government deficit.
- Adjusted fiscal picture (Table 3 highlights; percent of GDP):
  - Central government (selected years 2004–2006):
    - Revenue: 2004 = 33.8; 2005 = 43.7; 2006 = 51.3.
    - Expenditure: 2004 = 41.5; 2005 = 49.6; 2006 = 58.6.
    - Of which: wage bill: 2004 = 15.3; 2005 = 18.1; 2006 = 17.1.
    - Overall balance (including grants, excluding interest arrears): 2004 = -4.7; 2005 = -3.1; 2006 = -5.4.
    - Primary balance: 2004 = -1.7; 2005 = 3.7; 2006 = 2.3.
  - Adjusted fiscal position (including RBZ quasi-fiscal activities):
    - Primary balance: 2004 = -26.9; 2005 = -17.2; 2006 = -24.7.
    - Financing requirement: 2004 = -29.9; 2005 = -64.3; 2006 = -80.3.
  - Sources: Zimbabwean authorities; IMF staff estimates and projections.
- Implications and recent policy actions:
  - Although the government reported a small primary surplus around 2 percent in 2006, including RBZ QFAs shifts adjusted primary balance to a deficit of almost 25 percent of GDP.
  - Adjusted overall fiscal deficit or financing requirement, including government and RBZ interest payments, estimated at about 80 percent of GDP in 2006.
  - These large deficits have been partly financed through money creation, driving accelerating inflation.
  - Implicit taxation of the banking system (lengthening maturity of treasury and RBZ bills and paying highly negative real interest rates) mitigated otherwise higher money growth and inflation in 2006.
  - The 2007 budget announced transfer of all QFAs to the budget and that RBZ would no longer undertake new QFAs, but provided minimal credible measures to lower QFAs; total spending in 2007 likely to increase via supplementary budgets.
  - No evidence that RBZ refrained from QFAs in 2007; RBZ announced creation of a fully-owned subsidiary called FISCORP to carry out QFAs, which would not address fundamental issues (price and exchange rate distortions and poor governance in the public sector).
- Recommended approach from international experience:
  - Countries with high inflation and extensive relative price distortions require strong upfront adjustment through a broad-based policy package to establish credibility and minimize adjustment costs.
  - For Zimbabwe, five interrelated elements are identified as necessary in an initial stabilization package (elements are introduced here; the detailed list follows in the text beyond the provided excerpt).

*Source: _wp0799 - References (IMF staff paper, extracted content).*

### 1.      Transparent transfer of quasi-fiscal activities to the government budget, as

### Transparent transfer of quasi-fiscal activities to the government budget, as 

### Transparent transfer of QFAs and fiscal governance
- No entity outside the budget should undertake any activity of a fiscal nature (including interest payments, subsidized credits etc.) without offsetting transfers transparently provided for in the budget.
- Any QFAs carried out through the RBZ, FISCORP, the Industrial Development Bank of Zimbabwe or any other public entity should be covered via budgetary transfers.
- Purpose: increase transparency and accountability and strengthen fiscal governance by subjecting actions of a fiscal nature to normal budgetary scrutiny and procedures.
- Clarification: It is the new flows of activity previously done by the RBZ (or any other such entity) that need to be transferred, not the stock of losses from past QFAs. Unrealized exchange losses can remain in the RBZ’s balance sheet until recapitalization following stabilization.

### Required fiscal tightening and composition of adjustment
- Estimated need: a reduction of at least 10 percentage points of GDP in the adjusted primary balance (including the newly-absorbed QFAs) relative to the outcome in 2006 would be needed to lower inflation by about 800 percentage points.
- Rationale: A tightening of this order of magnitude or more would be in line with large fiscal adjustments made by other countries.
- Potential measures to achieve tightening:
  - Reduction in the government wage bill (noting the wage bill is large by regional standards and may reflect excessively large numbers of workers rather than an excessively high level of real wages).
  - Cuts in capital expenditure (capital expenditure more than doubled in real terms in 2006).
  - Cuts in (former) QFAs, particularly subsidies to public enterprises.
- Fiscal context and magnitudes:
  - Government revenue ratios were around 30-52 percent in 2004-06.
  - Adjusted primary expenditure is estimated to have amounted to some 75 percent of GDP in 2006, of which non-interest QFAs of the RBZ amounted to some 27 percent of GDP.
- Complementary measures: price and exchange rate liberalization would be needed to ensure that QFAs are durably reduced.
- Social priorities within a tighter envelope: ensure food security, rehabilitate collapsing health infrastructure, and provide a targeted social safety net to protect vulnerable groups, including those affected by HIV/AIDS and “Operation Murambatsvina”.
- Note on “Operation Murambatsvina”: U.N. estimates that some 700,000 people lost their home or source of livelihood, or both, and that a further 2.4 million people were indirectly affected in varying degrees.

### Exchange regime liberalization
- Unify the exchange rate and remove restrictions on current international payments and transfers.
- Immediate actions:
  - Substantially devalue the interbank exchange rate promptly and eliminate all multiple exchange rates.
- Subsequent sequencing:
  - Depreciate the interbank rate steadily toward the parallel market rate (which would appreciate as fiscal and monetary policies are tightened).
  - Once convergence occurs, float the unified exchange rate.

### Price deregulation and hard budget constraints on public enterprises
- Impose hard budget constraints requiring public enterprises to cut costs and operate at preset levels of budget subsidies and agreed pricing formulas.
- Deregulate prices and allow public enterprises to introduce cost-recovery pricing to move them to a commercial footing.
- Anticipated effects:
  - Price deregulation would likely lead to a one-off spike in prices, but strong fiscal adjustment would ultimately reduce inflation pressures.

### Monetary framework and anchor
- After exchange rate unification and RBZ disengagement from QFAs, establish a broad money anchor with a flexible exchange regime, using reserve money as the operational target.
- Rationale: An exchange rate anchor would be difficult because international reserves are low.
- Additional requirement: interest rates need to be gradually moved to market determined levels to ensure monetary policy effectiveness and reduce liquidity risks in the banking system.

### Structural reforms and governance for sustained growth
- Stabilization alone is insufficient; sustained growth requires comprehensive structural reform and better governance over the medium term.
- Structural priorities include:
  - Public enterprise reform.
  - Civil service reform to sustain a real reduction in the government wage bill.
  - Expenditure management and tax reform.
  - Central bank reform and recapitalization.
  - Land and agriculture reform (noting unresolved property rights issues related to land tenure and the limited security provided by recent 99-year leases).
- Governance improvements needed: protect private property rights and increase policy predictability to restore investor confidence.
- Recovery prospects:
  - Cross-country evidence: very high inflation is usually accompanied by sharp output contraction, but in successful stabilizations output often recovers quite quickly—usually within the first year or two of stabilization.
  - Zimbabwe may see an initial positive output response if inflation is brought down rapidly and prices are liberalized, but longer-term recovery hinges on addressing fundamental structural problems and land tenure issues.

### Role of external support
- Lack of external financing is a constraint but not a reason to delay stabilization: international evidence shows several countries achieved significant stabilization with limited external financing.
- Evidence and experience:
  - In all 30 stabilization cases between 1980 and 2005, inflation had fallen by more than 600 percentage points 12 months after the peak of inflation.
  - More than a third (12 cases) had official external financing at levels comparable to Zimbabwe (less than 4 percent of GDP) and had no Fund arrangement in the main year of disinflation.
  - Many of these cases benefited from nonfinancial external support in the form of close policy advice and technical assistance.
  - Within the subgroup with limited external financing in the first year of stabilization, 9 cases subsequently had either a Fund arrangement or close engagement (SMP, RAP); the remaining three cases were Brazil (two episodes covering May 1990–April 1991 and July 1994–June 1995) and Turkmenistan, which received technical assistance from the Fund.
- Implications for Zimbabwe:
  - Strengthening relations with donors and mobilizing external financing would ease the burden of the initial adjustment and provide room to address social dislocation from downsizing the public sector.
  - External policy advice and technical support would be essential to implement a broad-based stabilization package.
  - Longer term financing would be needed to support a medium term structural reform program.
  - If a credible stabilization package is implemented upfront and followed by reforms, Zimbabwe is likely to attract significant private capital inflows over the medium term.

### Key conclusions and recommended main elements of a policy package
- Conclusions:
  - Periods of high inflation can persist and accelerate without reforms, typically associated with loose fiscal and quasi-fiscal policies, relative price distortions, segmented foreign exchange markets, declining domestic financial intermediation, poor governance, and sharp output declines.
  - Gains from stabilization—rapid decline in inflation and recovery of output—can be achieved relatively quickly with a broad-based policy package that tackles underlying causes of high inflation.
  - A large fiscal adjustment upfront that especially reduces quasi-fiscal activities is at the core of such a package.
  - International support helps but is not always necessary upfront; nonfinancial support (policy advice, technical assistance) is valuable.
- Main elements of a recommended package for Zimbabwe:
  - (i) Transfer of all quasi-fiscal activities to the government budget;
  - (ii) Strong fiscal adjustment, including newly-absorbed QFAs;
  - (iii) Exchange rate unification and full liberalization of the exchange regime for current international payments and transfers;
  - (iv) Liberalization of price controls and imposition of hard budget constraints on public enterprises;
  - (v) A strong monetary anchor.
- Additional medium-term requirements: better governance, more predictable policy environment, strengthened property rights, and the structural reforms listed above to restore investor confidence, achieve stabilization, sustained growth, and poverty reduction.

*IMF Working Paper content unit: _wp0799 - 1. Transparent transfer of quasi-fiscal activities to the government budget, as*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2007/_wp0799.pdf_