Should the RBZ be independent?

DESPITE much having been written and said about the new draft constitution which goes to a referendum next Saturday, little has been written or debated around the key issues of central bank independence, which many economists have in the past highlighted as a weakness of the current set-up.

Clive Mphambela

Whilst the draft has been hailed in some quarters as being highly progressive in certain aspects relating to the Bill of Rights, citizenship and other political issues, some economists said the draft constitution was devoid of detail when it came to economic issues.

In a survey of economists’ views carried out by businessdigest this week, various schools of thought emerged, but there was general convergence on the notion that a key success factor in management of the country’s monetary affairs rests with an adequate level of independence of action of the central bank.

Tony Hawkins, economics professor at the University of Zimbabwe, who however, could not give a detailed comment on the subject as he also sits on the RBZ board, said the draft document was bereft of economic issues.

“I think the draft falls woefully short of economic issues such as central bank independence,” he said.

Another economic analyst who declined to be named said the draft seemed to scratch the surface when it came to economic issues, with relatively more space devoted to other matters.

“I have read the draft and noticed that the document does not deal in sufficient depth with the issues surrounding the operations of a central bank in Zimbabwe. Neither does the new proposed constitution make any serious attempt to fully and clearly define the roles of the central bank. More importantly, it does not provide for the clear independence of the central bank,” the analyst said.

However, another University of Zimbabwe economics academic, professor Ashok Chakravarti said a constitution could only enunciate the general principles that a society agrees to rule itself by, without the need to provide specific operational guidance on the functioning of any single institution within the three arms of government or agencies of the state.

He said in his view, the draft Constitution of Zimbabwe outlined the general principles of financial management, which includes the functioning of the Reserve Bank, in Part 6 of Chapter 17, which deals with the Reserve Bank.

“This section indicates that the main objectives of the Reserve Bank are to regulate the monetary system, protect the stability of the currency, and to formulate and implement monetary policy. In terms of general principles, I consider this to be an adequate statement of objectives, because the real powers and behaviour of the Reserve Bank will be actually determined by the Acts of Parliament which will cover its establishment and functioning,” Chakravarti said.

There is a general consensus amongst economists that the mandate of any central bank is to balance the twin but often conflicting objectives of maintaining monetary stability through primarily constraining inflation at low levels, whilst promoting economic growth. These objectives often conflict because promoting growth may require an expansionary monetary policy, which may be at variance with maintaining monetary stability.

“Therefore, in a developing country, a central bank cannot be allowed to decide upon its own objectives independent of national development policy. There cannot be a completely independent central bank which does not conform to the needs of the national economic strategies of the government.

“For the above reasons, a central bank in a developing country cannot be completely independent in its economic decision making. Even in a developed market economy, a central bank cannot be immune to the growth needs of an economy.

See how the Federal Reserve of the US, under direction from the US government, has been following an aggressively expansionary monetary policy to get economic growth and employment creation going in that country,” Chakravarti argued.

Charkravarti warned that excessive central bank independence could have an undesirable effect. He said whilst the RBZ Act Chapter 22:15 gives very wide powers to the RBZ and the governor to perform a wide range of activities, the powers were so wide that they effectively allowed the RBZ to become the Ministry of Finance of the country during 2000-2008.