THE International Monetary Fund (IMF) says the Reserve Bank of Zimbabwe (RBZ) needs to be independent from government to achieve its policy objectives.
In its working paper entitled Zimbabwe: A Quest for a Nominal Anchor, prepared by Arto Kovanen, the IMF said it was possible that once inflation declined to a relatively low level, another monetary aggregate, such as reserve money, could be useful for the conduct of monetary policy.
Kovanen said high inflation and the accompanying policies had undermined the stability of structural relations which was likely to complicate future macroeconomic management.
“I wish to emphasise that economic policies are only effective if accompanied by credible and genuine commitment of the authorities,” the report said. “In the past, the credibility of monetary policy has been undermined by the lack of support from fiscal policy as well as the lack of consistency in policy implementation. Strengthening the Reserve Bank of Zimbabwe’s independence and clarifying its policy objectives should assist in enhancing its credibility.”
In the report the IMF came up with a six-point conclusion. It said there was a strong linkage between the currency in circulation and the price levels in the country, which suggests that the currency in circulation would provide a good leading indicator of any future price movements.
The report said that a “cointergration” analysis establishes a well identified “long-run money demand relation for currency in circulation, suggesting that this monetary aggregate could be helpful to the Reserve Bank of Zimbabwe as an intermediate monetary operating target”.
It said the reserve money which the central bank had been using as an intermediate policy target, was ineffective in a high inflationary environment, “because the demand for reserve money is not well-defined while its information content for predicting future price movements is weak”.
“Well-defined money demand functions for narrow and broad money cannot be established in the full sample,” the report said.
“Statistical relations seem to break down during the high inflation period of the past few years. This raises serious challenges for monetary policy implementation, particularly regarding the appropriate anchor to facilitate disinflation in the Zimbabwean economy.”
The report said the pegging of the exchange rate had not succeeded in constraining other monetary and fiscal policies.