AMONG many prerequisites for any economy to be viable and grow is a central bank that fulfils key functions of supervision and direction of the financial sector in general, and banking institutions in particular. That central bank must influence money supply and contain inflation, albeit not being otherwise actively engaged in the country’s economic activities. In order to fulfill these critical functions,the central bank must have substantive autonomy and authority. In the absence of a central bank vested with such characteristics and objectives, no economy can successfully function, let alone attain and maintain growth.The necessity of such a central bank has been convincingly proved in the UK in the form of the Bank of England, in the US by the Federal Reserve, in South Africa by the South African Reserve Bank and in Israel by the Bank of Israel, among other countries. This was also very evident in Rhodesia, as this country was known before Independence. However, since 1980, that has not been so, and the magnitude of government’s authority and control over the Reserve Bank of Zimbabwe (RBZ) has been a major contributor to the prolonged decimation of that which could be an extremely virile and successful economy. Nevertheless, since the “inclusive government” came into being in 2009, there has been a marginal reduction of involvement by government in the operations and conduct of the RBZ. The lessening of government involvement included the appointment of a prima facie independent board of directors.
Before 2009, the RBZ was recurrently forced by government to be its banker, to print currency without requisite supportive reserves and in such excess as to fuel the highest hyperinflation ever experienced anywhere in the world. Government imposed upon RBZ a lot of functions and duties which were grossly in conflict with those of a central bank, which included the purchase and distribution of agricultural and farm implements, the purchase of motor vehicles for politicians, judges and others as well as buying houses for judges and senior military personnel. The RBZ was thus reduced to a state of quasi-insolvency, and was unable to manage money supply (but effectively was forced to increase such supply excessively, with commensurate economic prejudices).The latter destroyed the value of the Zimbabwean currency which was devoid of necessary back-up reserves and was devastated by the hyperinflation created.
Consequently, confidence of businesses and the populace in the banking sector was destroyed, with the resultant discontinuance of use of banking services. This generally became a key contributor to the near total demise of the economy. As a by-product of these ills caused by government, the return of exporters’ deposits was recurrently withheld, jeopardising their ability to continue operations. Similarly, much of the earnings of the mining sector were not remitted to miners, retarding their operations and growth.
All these factors and their consequences progressively destroyed the economy to a major extent, resulting in increased unemployment, business closures and severe hardships for most Zimbabweans. Together, they constituted an immense deterrent to both domestic and foreign direct investment which could have assured economic well-being. The RBZ was so eroded of resources that it could not fulfill a key role of a central bank; that of Lender of Last Resort; by effecting overnight lending to banks and other financial institutions, thereby assuring the security of customers’ deposits. Instead the RBZ worsened the absence of confidence in the banks.
In 2009, the then newly-appointed Minister of Finance, Tendai Biti, sought to remedy these RBZ problems by limiting its fields of operation to, primarily, supervision and maintenance of international yardsticks of good banking practice, management of money supply (although the scope for such management was limited in the absence of Zimbabwe having its own currency), and to functioning as a Lender of Last Resort to the banking sector, although the ability to fulfill that function was and still is constrained by the RBZ’s lack of resources. Pursuant to the RBZ disengaging from its many other activities, it is now actively pursuing disposal of many of its subsidiaries, and the successful conclusion of such disposals will partially address its near-total lack of resources. However, the magnitude of its liabilities substantially exceeds the expected windfall from the disinvestments. The RBZ requires significant funds to redeem the “tradable” bonds which it issued to gold miners in lieu of payment for their output, and to effect belated payment of funds due to exporters and others who held funds in foreign currency accounts which the central bank peremptorily acquired.
On a number of occasions, Biti has intimated government’s intention to assume the liability for the redemption of the tradable bonds, but that intent has not been fulfilled, presumably because the fiscus is bankrupt. Similarly, he has claimed the RBZ would be recapitalised, but that too has not transformed from words into action. If the RBZ is to be enabled to fulfill its essential role in the Zimbabwean economy, as is the case with central banks in many countries, and if confidence is to be restored in the Zimbabwean economy, the overdue recapitalisation of the RBZ and its redemption of immense indebtednesses must be effectively addressed with utmost urgency. The bank is indebted to, among others, the mining, commercial, industrial and other economic sectors as well as NGOs. The measures which must be pursued and implemented include the following:
- Biti must forthwith access the more than US$200 million of unutilised Special Drawing Rights accorded Zimbabwe several years ago by the International Monetary Fund, and apply the bulk of such funds to the recapitalisation of RBZ.
- Biti must urgently fulfill his previously declared intent to assume, through the fiscus, the liability to holders of the RBZ issued tradable, redeemable bonds, with realistic provision of objective and practical timetables for the redemption thereof, inclusive of accrued interest.
- Government should give serious consideration to enabling private sector investment into RBZ’s capital base in the same manner as the South African Reserve Bank has private sector shareholders over and above the government-owned shareholding in that central bank.
- A well-intentioned review by government of measures and legislation to ensure real autonomy and independence of the RBZ, notwithstanding that the appointment of RBZ’s board of directors shall remain the prerogative of government.
Should these and ancillary appropriate actions be pursued, the RBZ will transform into an effective, autonomous central bank, enabling it to fulfill, directly and indirectly, a substantive role in restoring confidence in the banking sector by motivating foreign investment. In general this will accelerate a significant upturn of the economy, and maintain the attained economic revival.