John Maynard Keynes once said: “The state of confidence, as they term it, is a matter to which practical men pay the closest and most anxious attention”.
Financial Matters: Tinashe Kaduwo
We are much entrenched in the currency debate, which if we are not careful, may force us to overlook the real issues that have kept confidence at its lowest ebb. Much of the economy’s problems are of confidence issue. Yes it is critical to fix the currency issue but without proper institutional reforms, that currency project will certainly fail. The country currently has one of the best cabinet teams with technocrats in the mix, which should in itself send a positive message to investors. However, investors have remained wary as the country is yet to establish a track record of reforms.
One of the major concerns among investors is the strength and independence of our key institutions, particularly the Reserve Bank of Zimbabwe (RBZ). Over the years, there has been gross abuse of the central bank from the government which raises questions on its independence. The apex bank, due to a lot of influence from politicians who are the leaders in government, failed to act as a regulatory board regarding public debt operations. One of the critical functions of the central bank is keeping government debt in check, a key pillar in maintaining confidence. The collapse of dollarisation and the de-dollarisation attempt using bond notes is not that they were bad policies — but were all a result of government’s influence on the central bank. It is high time we re-looked at laws governing the central bank and make it truly independent. Any currency reform without strengthening the currency issuer and regulator, which is the RBZ, is doomed to fail. Dollarisation could have worked if the government had respected the central bank’s space and adopted consistent economic policies. Re-dollarisation attempts using bond notes could also have been a success if there was no fiscal dominance.
Government’s unrestrained spending has resulted in the RBZ’s monetary financing of fiscal deficit, an act of fiscal dominance. Even without sufficient reserves, reintroduction of own currency may also be a success if the RBZ is truly independent. However, the current set up where the central bank is more of an extension of a partisan government is in itself the major confidence setback to own currency reintroduction. Under normal circumstances, the independent central bank should be leading the currency debate and advising the government, not the other way round.
When the partisan government leads currency reforms other than independent institutions, there is risk of their acceptance by successive governments, threatening continuity of the policy. It is high time we separated the central bank from government and make it truly independent. History has shown that regimes that have chosen to remain blindly loyal to their ideals, be it left or right, have paid a heavy economic price. Zimbabwe is a good example and its experience is well-documented. A truly independent central bank will also help instil fiscal discipline, accountability and transparency. Fiscal discipline will be enhanced as the government will not turn to the RBZ for financing at will. It entails that the government would have to approach the RBZ with a proposal regarding any financing needs and the apex bank would make informed decisions, taking into consideration the current economic conditions and any other relevant information. Instead of being driven by political heaves, the RBZ could act as the voice of reason. This implies that the RBZ would technically be in charge of regulating public debt and would therefore be in control of price levels. In such a system, Monetary Policy will be effective in ensuring price stability which is currently missing. Fiscal action is currently the major determinant of prices and the RBZ is rendered unable to fulfil its key mandate of maintaining price stability. For instance, it took a fiscal action to halt price carnage in the fuel sector as monetary policy is being dominated by fiscal action.
Independent central bank which keeps government debt in control is required for confidence and to ensure stability, as well as sustainability of any currency path the country may take.
Kaduwo is a researcher and economist, contact firstname.lastname@example.org.