Reform the Reserve Bank first

ontemporary economics places Central Banks at the heart of key economic variables. Central banks have far-reaching impacts and responsibilities in driving economic development and political stability in any country.

Rodney Ndamba,Analyst

According to Arnold (2012), between 2008 and 2011 many countries leaned heavily on central banks to bail them out of deep economic difficulties. The functional responsibility of central banks is spread broadly from providing stability in the financial system, economic health to social and political stability in a nation. However, this is dependent on the governance and governmentality of the Central Bank which should be aligned to driving economic growth not preserving self-serving institutional considerations.

This article provides a critical and comparative analysis of the Reserve Bank of Zimbabwe (RBZ) which seems to be the missing link in the current government’s reform agenda. In many countries, the central bank is the cornerstone of economic development and key indicator for attracting long term investors who takes long term positions and prefer countries with stable financial systems.

In Zimbabwe, state-owned enterprises (SOEs) have been targeted for reform in a bid to improve current economic performance and attracting foreign direct investment. However, the RBZ, being a key indicator for achieving sustainable economic recovery, development and competitiveness, seems to be receiving little attention in the reform agenda, leaving those at the realm exposed to unwarranted criticism.

Without any reforms to the current governance and governmentality framework of the RBZ, any government today and in future is guaranteed of marginal economic successes. Long-term investors pay attention to how the central bank operates, is governed and provides sustainable monetary policies that drive sustainable economic growth without being too contaminated with the politics of the nation.

It is important to highlight that any country’s monetary system depends on the framework of governance, vision and ambitions of its central bank for the economic sustainability.

This article explores the comparative experiences of the central banks of emerging economies like South Africa, Kenya, Rwanda and Nigeria which have managed make strides in economic development which should inspire Zimbabwe’s economic recovery ambitions. The article does not seek to apportion blame or focus on the governor of the RBZ or individuals currently running or those who previously run the central bank, but place attention on the governance framework. Further, the idea is to make a comparison with other central banks to build a case for reforming the governance and governmentality of the RBZ. RBZ has an important responsibility for driving economic growth, provide strong monetary policy and sound financial systems. It is important to acknowledge that at the heart of Zimbabwe’s economic owes has been weak institutions unlike our neighbours like South Africa. In this context, weak institutions are those that easily succumb to political influences due to the governance framework and functionalities.

This has ripple effects on economic and political stability in any country. A newly appointed governor of the central bank of Tanzania, Professor Florens Luoga, a tax law expert, remarked that his first mandate was to clean up the banking sector and leadership at the Bank of Tanzania (Business Daily, 2018).

It is vital to acknowledge that central banks play a critical function in strengthening the financial system through regulation, rules on reserves and controlling the powers of some mighty banks, lender of last resort, tightening the capital and liquidity ratios (Glen, 2012). However, in some countries alternatives are established to handle other functions so as to leave the central bank to focus on its core function. Unlike in Zimbabwe when the central bank ended up distributing foodstuffs and agricultural inputs in 2008 at the expense of focussing on addressing speculation and stabilising the banking sector. Key to a central bank’s functions is managing the amount of money in the economy and interest rates through sound and sustainable monetary policies. There are options as to whether to use: “Open market operations”, “discount rates” and “reserve requirement ratios” to control money in circulation and interest rates (Glen, 2012).

Economic analysis shows that a central bank’s functions have significant impacts of key economic variables such as expansion and contraction in the economy, financial markets stability and macroeconomic developments (inflation, employment, economic growth, interest rate stability and trade). It is evident that a central bank’s functions cannot be isolated from economic performance and political stability. A hypothesis can be developed thus: where a central bank is poorly governed, the economy tends to perform poorly and the environment tends to be associated with political instabilities. This hypothetical proposition can be explored in many African countries with empirical results.

The governance of a central bank determines the extent and significance of its contribution to economic sustainability in any country. Glen (2012) points out that it is important for a government to decide the degree of independence of its central bank to conduct monetary policy. However, Glen highlights that where there is political control of the central bank, high inflation tends to be a feature due to the short-term perspective of politicians to impress voters. Further, there are always temptations to support government spending through issuing treasury bills. Consequently, politicians lack the necessary expertise and tend to lead to central banks failing from time to time.

It is important to acknowledge that central banks make decisions that affect everyone including private and public sector businesses, yet in some countries the central bank is under the control of politicians who are only accountable at the ballot box at the end of their 5-year term in the case of Zimbabwe. South Africa is different in that the central bank is owned jointly by private investors and government. In such as system, there is greater accountability all the time, which contributes to economic growth and development.

Reforming the RBZ remains an important task for the Government of Zimbabwe in the quest to achieve economic and political stability in addition to restoring confidence in the banking sector. The governance and governmentality of the RBZ, which is 100% owned by the government, is crucial. Compare this with the Reserve Bank of South Africa (RBSA) which is owned by more than 660 shareholders who include private investors and government. The RBSA has an obligation for accountability and is stable due to limited interference by politicians.

While Kenya, Nigeria and Rwanda have 100% government-owned central banks, they allow them to operate with some degree of independence. Therefore, reforming the RBZ to operate with some degree of functional and governmentality independence with limited political interference provides an antidote for bringing confidence in the banking sector in Zimbabwe. The hybrid ownership of the Reserve Bank of South Africa has allowed the bank to provide monetary policy that protects investor interests and supports economic growth. Comparatively, South Africa has one of the continent’s strongest financial systems and robust financial sector in Africa unlike in Zimbabwe where the central bank is mistrusted by the local banks. Today, many people prefer mattress banking than local banks. Public confidence in the banking sector has plummeted.

Business scientists believe that there is substance in the mission and vision statements of any organisation. Such statements communicate the direction of the organisation.

Looking at the RBZ’s mission statement: “Maintaining financial stability and financial inclusion through credible policies and risk-based supervision of banks, supported by a skilled human resource base and a modern integrated ICT system”, shows a clear disconnect between the institution and the imperatives of economic growth and development.

Compare this to the Reserve Bank of South Africa’s mission statement: “To achieve and maintain price stability in the interest of balanced and sustainable economic growth in South Africa” (RBSA, 2018) and the Nigeria Central Bank statement: “To be proactive in providing a stable framework for the economic development of Nigeria, through effective, efficient, and transparent implementation of monetary and exchange rate policy, and management of the financial sector’ (CBNi, 2018). The mission statements of the central banks of South Africa and Nigeria are linked to economic growth and development unlike that of the RBZ which looks self-serving.

A comparative analysis of the governance framework of the Reserve Bank of South Africa showed that there is a pronounced policy to reserves seats on the board of directors for key economic sectors like mining and agriculture. In addition, RBSA makes it clear that their function and mandate is to regulate the banking and financial systems in South Africa unlike the RBZ which is not so clear between regulatory or supervisory functions. The RBZ does not seem to have the mandate to regulate banks in a way that strengthens the banking sector. Comparatively, the Securities and Exchange Commission of Zimbabwe has fared much better in the role of regulator than the character portrayed by the RBZ which could be associated with its governance framework.

At one point, the RBZ issued a statement request the lowering of banking charges, but it seems to have been largely ignored by many banks in Zimbabwe, proving a point that the RBZ may not have the powers that the public thinks it possesses.

Therefore, this article calls for a relook at the RBZ Act itself as a starting point to ensure it grants the necessary powers and responsibilities. The Act should be reformed to provide an appropriate governance system that allows the central bank to focus its attention on strengthening financial systems and contributing to economic growth.

For example, the current system allows the RBZ governor to serve both as governor and board chairman against corporate governance practice which requires an independent non-executive member to chair the board (King IV, 2017 and ZIMCODE, 2015).

In conclusion, this article believes that with these few indicators and framework insights, it is important to stimulate national discourse on reforming the RBZ to enable the economy to achieve competitiveness and sustainable growth supported by stable financial systems.

Any government today and in future will not achieve any meaningful or sustainable economic recovery without a reformed RBZ governance and governmentality framework that brings confidence to investors and depositors in the banking sector in Zimbabwe. From the externalisation list, clear indications emerged that Zimbabwe has relatively weak financial systems and regulatory frameworks which could be a cause for concern to sustainable investors who are interested in a Zimbabwe that is “Open for business”.

“Deep Pocket” investors consider a lot of fundamentals including country risk profile, monetary policy systems, banking sector stability and local trust of the banks in their own country. Therefore, reforming governance and governmentality of the RBZ is a national priority for sustainable economic recovery, stability and competitiveness with the goal of long-term political stability in Zimbabwe.

Ndamba is an academic and founder of the Institute for Sustainability Africa (INSAF). These New Perspectives weekly column articles are coordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society (ZES) Email +263 772 382 852 and Email

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