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
analyst
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.
