Central bank independence needed now more than ever

Insight
Howdy folks!

You have to pardon your country boy for going AWOL; but it’s always good to be back.

I return at a time when the Reserve Bank of Zimbabwe is expected to announce the Mid-Term Monetary Policy Statement tomorrow, and when a number of developments have been taking place on the macroeconomic front.

The central bank is, more than ever before, required to rise to the occasion.

Folks, the central bank is presenting the Monetary Policy at a time when inflation has been charging upwards to close the month of August at 4.83 percent, not very far from the all-time dollarization high of 5.3 percent recorded in May 2010.

On the international front, the United States’ Federal Reserve Bank has also increased interest rates by 25 basis points. Another increase is expected in December, with three more pencilled for next year.

The interest rate hikes by the Fed are likely to strengthen the greenback, which might affect Zimbabwe’s exports, especially to South Africa, our biggest trading partner. This might also encourage imports from across the Limpopo, subsequently worsening the country’s balance of payment position.

The position might also lower remittances from South Africa, which houses the majority of Zimbabwean migrants, as the rand has already been weakening to the dollar. On top of that, the hike may also affect gold prices at a time when gold is one of the country’s top exports.

The raises the question on whether the US dollar is still the sustainable currency to support Zimbabwe’s economic turnaround. It raises the question on how the central bank, which is constitutionally mandated to protect the Zimbabwe’s currency, will respond to ensure there is a currency matrix that supports optimal growth and development.

Already, the central bank is suffering from confidence misgivings arising from various acts of commission or omission.

The structural architecture of the central bank itself does not exude much confidence, which is why Zimbabwe is sometimes cited amongst African countries that have central banks that could do better with certain reforms.

So funding issues aside, would it cost a cent to reform the central bank to ensure that it is strengthened in terms of transparency, accountability and independence? Of course not.

The central bank should be empowered to expose any fiscal misdemeanours in the country. This independence will shield monetary authorities from short-term political influence when fulfilling their mandate.

Fostering independence will help address some of the double standards being imputed on the central bank by various stakeholders. For instance, while the central bank has been calling for market discipline, it has not been disciplined itself when it comes to extending excessive overdraft facilities to Government.

This has resulted in the crowding out of the private sector. It has also widened the gap between RTGS balances and cash, with has reduced cash to deposits ratios. This widening gap, coupled with the pegged exchange rate, has caused foreign currency shortages in the official markets, and created a thriving parallel market that is charging usurious premiums, thereby increasing the cost of production.

This has pushed upwards the prices of goods and services. All this is coming against stagnant salaries.

In playing its role of regulating the monetary system and managing the currency system, the central bank is required to foster balanced and sustainable economic growth. That can only happen when we have sanity prevailing in our financial systems, which is why structural and governance reforms are indispensable for a proper functioning central bank.

Without such a structural set up, monetary policies will continue to come up with strategies that will fail to inculcate confidence.

The Mid-Term Monetary Policy should therefore attempt to institute concrete monetary reforms that are inspired by market reality and with the ability to decisively deal with the greenback shortages, speculations, hard currency externalization, hoarding and rent seeking in the foreign exchange market.

The central bank should also not ignore its own rules, if it is to be taken seriously. For instance, nearly two years after the introduction of bond notes, the central bank has not yet appointed an independent board to monitor the notes in circulation. The bank had promised to do so.

Questions also have to be asked on whether it is practical to continue insisting on an equivalent exchange rate between RTGS, bond notes and US dollars when it is worsening the allocation mechanism. Already, even items classified in the forex allocation top priority list are failing to get adequate foreign currency.

The central bank must urgently deploy monetary policy tools to bridge the gap between the official rate and that of the parallel market, while paying particular attention to the supply side of the market. At the moment, the parallel market seems to be the only market where demand and supply interact to determine the exchange rate.

This has left your cowboy wondering who exactly is the governor of the Parallel Market Reserve Bank.

Given the widening gap between parallel market and official rates, it is prudent for the central bank to consider selling forex at half the premium being charged by the parallel market. However, this should not prejudice members of the public in terms of the bank balances held in US dollars.

The balances can be ring-fenced and honoured within a specified period of time as foreign currency inflows improve. Having done that, the central bank can then allow for some flexibility in the allocation of foreign currency.

Much of the demand for the hard currency is unjustified as it arose from an excessive money supply that will whittle away as things fall into place.

Later folks!

Clemence Machadu is an economist, researcher and consultant. He writes for The Sunday Mail in his personal capacity.