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Central bank, monetary policy independence

THE government of Zimbabwe recently dissolved the inaugural Monetary Policy Committee (MPC) that had been appointed in September 2019 and swiftly appointed a new team to fill up the void. The committee draws its existence from the Reserve Bank of Zimbabwe (RBZ) Act Chapter 22:15 sub-section 29B.

Victor Bhoroma

The law states that there shall be a monetary policy committee independent of the RBZ board, comprising the governor as chairperson and the deputy governors, and five to seven other persons appointed by the president after consultation with the minister.

The law further states the functions of the committee are to determine the monetary policy of Zimbabwe, including the setting limits on open market operations of the Bank; to ensure price stability as defined by the government’s inflation target set out in the national budget; to determine interest rates for the economy in line with the government’s economic policies and targets for growth and employment.

However, the law restricts the authority of the committee in highlighting that the committee shall submit its findings to the central bank board for information purposes only.

The central bank is wholly owned by the state as its sole banker and its leadership is appointed by the President for a maximum of 10 years, consisting of five years each.

Due to the harm caused by unabated money printing and quasi-fiscal operations of the bank in the past 20 years, there have been calls to abolish the bank or to give it independence from the state.

Section 8 of the RBZ Act points that nothing shall prevent the state from carrying on transactions in such manner as the State may require and, if so requested by the State through the minister in writing, the Bank shall make the necessary arrangements to this end.

In 2019, the International Monetary Fund warned that the government needed to give autonomy to its central bank if it is to avert the risk of plunging the economy into hyperinflation after every 10 years.

The Bretton Woods institution pointed out that high levels of inflation are a result of failure to detach monetary policy from government policies and failure to effect institutional reforms that separate monetary policy and politics. The government has over the years relied on the central bank’s function of money printing (physically or through electronic means) to plug consumption-induced budget deficits and this has increased the government appetite to spend beyond tax revenues.

The Treasury recently tabled a US$1,4 billion debt (part of the foreign debt) incurred by the central bank, which will now be assumed by the taxpayer. Despite declaring successive budget surpluses, the treasury highlighted that the debt had been incurred to fund government expenditure and stabilise the local currency.

This clearly means that the central bank now directly funds government expenditure and is acting as an extension of the Treasury.

Reforms after hyperinflation

World over, most central banks are owned by the State partially or wholly. A number of Latin American countries such as Mexico, Chile, Argentina, Bolivia, Peru, Ecuador and Guatemala instituted reforms that gave their central banks independence after periods of hyperinflation (above 500%) had ravaged their economies.

Part of these reforms restricted central bank financing of public expenditure as the facility had been previously abused for short term political gain by successive governments. Central banks also migrated from exchange rate pegs that caused foreign currency shortages in the formal economy and moved towards exchange rate flexibility (managed float). The reforms successfully managed to tame inflation and restore public confidence in the financial sector.

Role modelling

The Bank of England (where most central banks in the world borrow their model from) is owned by the government of the United Kingdom since its nationalization in 1946. In May 1997, the Bank of England was given operational independence over monetary policy so as to curtail political influence from government.

The low levels of inflation in the UK, which averages 2% in the past 10 years, has been attributed to the bank’s quest for transparency and the reforms instituted in 1997. The South African Reserve Bank (SARB) is privately-owned even though the government has announced plans to nationalise it in future in line with most countries.

The SARB governor and deputy governors are appointed by the president of South Africa in consultation with the Finance minister as is the case in Zimbabwe. The SARB interest rate is 6,5%, in line with the inflation target of 3-6%.

However, it is the independence of the monetary policy that has brought prolonged low inflation levels and economic stability in South Africa. Even though the South African rand has been volatile in the past due to depressed economic performance, unstable commodity prices and political unrest, the SARB has maintained its independence from politics and is run transparently.

The exchange rate is market determined, even though the central bank may intervene when there is high volatility.

State ownership, economic instability

Most central banks in Africa are wholly owned by the State, including current flagbearers in economic transparency such as Mauritius, Tunisia, Morocco, Botswana, Rwanda, Tanzania and Ghana. However, the level of inflation and economic stability in those countries is directly correlated to central bank transparency and monetary policy independence.

As a result ownership of the central bank is largely similar, what distinguishes various economies is the level of transparency and institutional mechanisms that bring good governance and transparency.

Central bank quasi-fiscal activities

Between 2005 and 2008, the Zimbabwean central bank carried out various quasi-fiscal operations that were key drivers of hyperinflation in the economy. These included the 2005 Agricultural Sector Enhancement Productivity Facility, Operation Maguta, Parastatals and Local Authorities Reorientation Programme and the Basic Commodities Supply Side Intervention.

Since the RBZ Debt Assumption of 2015, the bank has been running with several quasi-fiscal activities such as supporting small-scale gold and tobacco production, funding consumption subsidies (for commodities such as fuel, cooking oil, wheat, soya and others), boosting tourism, funding agricultural inputs, cross-border trade and export incentive schemes, among others, while crowding out the country’s financial institutions such as commercial and merchant banks. These quasi-fiscal activities have directly contributed to inflation growth and had various rent seeking loopholes that nurtured corruption. Currently the central bank has taken the role of allocating foreign currency in the economy, even to the level of incurring huge external debt to support the prevailing exchange control model. This would not be necessary if the exchange rate was market determined and efficient.

The RBZ is evidently far from being independent and the MPC does not wield sufficient legal authority in implementing monetary policy as is the case in other countries. However, the existence of the MPC brings some level of checks and balances to the board of the central bank in policy planning. In the medium to long term, the central bank requires absolute independence from the government on monetary policy in order to separate monetary policy and government policies.

Critically, institutional reforms that bring monetary policy independence are long overdue in order to separate politics and the running of the central bank. Parliament would need to be empowered to hold the bank to account and enforce transparency in the interest of public good and economic stability. Economic stability can only be sustainable through instilling public confidence in monetary policy, implementing free market policies on exchange control and abiding to full disclosure on public debt and its utilisation. In the end, the buck stops on political will to institute good governance at the central bank, as is the case in other stable African economies.

Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: email: vbhoroma@gmail.com or Twitter @VictorBhoroma1.

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