Reforming the RBZ towards economic stability

ZIMBABWE has been in deep political and economic crises that have plagued the country over the last 23 years, with a brief hiatus between 2008-2013.
One of the decisive factors behind the current economic malaise has been the conduct of the Reserve Bank of Zimbabwe (RBZ). According to Zimbabwe Market Watch, the local currency has shed 208% of its value against the United States dollar on the parallel market since the beginning of 2020. Inflation has continued to spiral despite announcements by the authorities that inflation would decline by the end of the year.

Tawanda F. K. PASIPANODYA
Accountant

The current monetary crisis appears to be a replication of the monetary crisis of the lost decade, between 1997-2008. The pegging of the local currency to the US dollar at a rate of US$1 to ZW$25 against the backdrop of deteriorating macro-economic fundamentals has created a continuously widening exchange-rate gap with the parallel market exchange-rate. A sub-optimal supply of notes and coins against electronic money balances and the divergence of the parallel market from the pegged exchange-rate have led to pricing distortions reminiscent of the period between 1999 and 2008 when the RBZ overvalued the currency and the accompanying cash shortages experienced at regular intervals between 2002 and 2008.

Quasi-fiscal activities of the central bank such as the Winter Planting Scheme are replicas of the Farm Mechanisation Programme of 2003-2008 which resulted in additional money supply and debt which was passed on to the taxpayer through the RBZ (Debt Assumption) Act of 2015.

An ignominious similarity between the current inflationary period and that of the past is the sharp increase in annual inflation induced by sharp increases in the supply of reserve money. The precipitous economic decline between 2000-2008 due to the monetary interventions saw an International Monetary Fund (IMF) director, through a leaked diplomatic cable, in 2006, brand the RBZ governor at the time, Gideon Gono, as the worst central bank governor in the world for resorting to monetarisation of deficits as a solution to the country’s economic problems.

Given the similarities of the interventions and policy mishaps between the current governor, John Mangudya and his predecessor, many have also viewed him in similar light. These sentiments are partially justified due to the governor not acting in a manner that demonstrates an understanding that the office he presides over relies on credibility which is a function of the governor’s speech and conduct over policy issues.

To date, the governor has done little to enhance the credibility of his office as exemplified by the failure of the bond notes and coins and, more recently, his remarks to the Budget and Finance Parliamentary Committee when he asserted that spiritualism was behind the economic decline.

Much of the financial system’s decline can be attributed to the central bank’s institutional and ideological setting. The apex bank’s ideology can easily be deduced to one that settles on money printing as the solution to macro-economic problems as shown by its conduct during the 1997-2008 crisis and the current crisis.

The institutional setting shows that the central bank authority’s decision-making processes are premised on arbitrary political decisions with limited regard to the economic and social ramifications. This has been shown by how the RBZ has been slow and inconsistent in the implementation of its own policies.
The IMF in its 2019 report on the Staff-Monitored Programme highlighted that the country’s economic problems have emanated from foreign exchange and monetary policies. The central bank has not implemented the monetary targeting framework it announced in its 2019 Monetary Policy Statement and has, instead, continued to increase the supply of reserve money into the economy.

According to the IMF, conversion of US dollar-denominated assets at an exchange rate of 1:1 into RTGS dollars in October 2018 saw banking sector assets shrinking from 58% of gross domestic product in December 2018 to 24% in September 2019. Public sector real wages have been eroded by more than 80% from an average of US$5 000 a year in 2016 to less than US$1000 per year by the end of 2019.

A leaked letter from Finance and Economic Development minister Mthuli Ncube addressed to international creditors admitted to these policy missteps. The establishment of the currency stabilisation taskforce in March 2020 was a vote of no confidence, by the minister of Finance, in the RBZ’s leadership and an indictment of the bank’s role in the monetary turbulence the country has been experiencing.

Even in the face of such evidence, the central bank continues to attribute blame for the economy’s decline to third parties.For the RBZ to impose tough restrictions on the transactions of mobile money agents without addressing the underlying business fundamentals yet it is the RBZ that has been fuelling speculative activities by increasing money supply in a contracting economy is disingenuous.

The current constriction in the use of mobile money transfer and banking services is reminiscent of the moment in October 2008 when the RBZ purportedly suspended the use of the RTGS platform citing rampant abuse of the system by speculators, only to reverse the suspension in November of 2008.
With the unfolding crisis bearing a striking resemblance to how the 1997-2008 crisis unfolded, many have suggested that the country must permit the US dollar to become legal tender to avoid a repeat of the catastrophic collapse witnessed in 2008.

In the medium to long term the re-introduction of a local currency would be necessary but, given the huge appetite to print money exhibited by the authorities, it may be necessary for the country to enter the Rand Common Monetary Area and institute a currency board operating in parallel to the central bank. For the currency board to be successful in its mandate, full autonomy, free from political interference, should be granted to it.

The local currency would be pegged to a weaker currency such as the South African rand and the currency board will issue local currency based on the US dollar and rand reserves. Removal of the issuance of currency function from the central bank would help alleviate inflationary pressures and induce macro-economic stability necessary to support domestic savings, investment, and long-term growth.

Such an arrangement has its economic and political limitations but given the perpetual economic crises that Zimbabwe faces, the advantages of instituting a currency board outweigh the disadvantages. Increased central bank independence and privatisation as is the case with the South African Reserve Bank may help increase confidence in the RBZ and make it operate more transparently. To improve transparency and restore the accountability of the RBZ to the citizenry, public interviews for the position of governor may be conducted as is the case with the judiciary.

Just as a lifetime of savings was wiped out in years towards 2008, so will the value of 10 years of savings beginning 2009 continue to be wiped out. Going forward, this is not sustainable and that is why it is of paramount importance that given the modus operandi of the central bank, it must be reformed, and its functions streamlined if the country is to recover.

Pasipanodya is head of research at the Zimbabwe Economic Youth Foundation. These weekly New Perspectives articles are co-ordinated by Lovemore Kadenge, immediate past president of the Zimbabwe Economics Society . — kadenge.zes@gmail.com or mobile +263 772 382 852.