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Rethinking On RBZ Independence

According to Section 11(1) of the Reserve Bank Act (Chapter 22:15), lending to the state by the Reserve Bank of Zimbabwe (RBZ) at any time should not exceed 20% of the previous year’s government revenues.

The government is currently in breach of the stipulation as its borrowings from the RBZ exceed 25% of last year’s US$4,3 billion government revenue. The central bank will release its 2018 Monetary Policy Statement in the coming week which is expected to shed more light on the level of government borrowing, currency path and, most importantly, interventions to control rising inflation among others. The major role of the RBZ as stipulated in the RBZ Act is formulation and implementation of monetary policy, directed at ensuring low and stable inflation levels. However, the level of Government spending is now proving a challenge to price stability, highlighting the degree of influence of the government’s fiscal policy. While monetary policy is generally operated by an independent central bank, fiscal policy falls under control of a partisan government.

The government over the years has been acting as the country’s economic engine, leading to the accumulation of high levels of fiscal deficit and resultantly high levels of public debt. In this case, rethinking on RBZ independence is crucial given high government expenditure and fiscal debt. The government is, and has been running a persistent fiscal deficit because of increased spending and an inability to secure funding from creditors due to damaged perception. As a result, the government has been turning to the RBZ to secure additional financing and in the process breaching set standards — an act of “fiscal dominance”. This shows the degree of influence the government has on the central bank. A clearly independent central bank system would keep the government in check by refusing overdrafts and issuance of sovereign paper to finance uncontrollable deficit spending. This would force the government to act with greater caution when making any fiscal decisions. Current price instabilities are a true reflection of government’s accumulated fiscal deficit which has led to high level of public debt.

The solution to price increases in this country is to allow the RBZ to act as a regulatory board for the government regarding public debt operations. This is critical especially in an election year as politicians who are the leaders in government commonly utilise economic policy in order to justify the success of their political ideology. Politicians often do this because it gives them greater political capital to push their ideology and blame other external situations or opponents for the country’s woes. History has shown that regimes that have chosen to remain blindly loyal to their ideals, be it left or right, have paid a heavy economic price. Zimbabwe is a good example in this and its experience is well documented.

 If the RBZ is truly independent, the government will not be able to breach set limits. It entails that the government would have to approach the RBZ with a proposal regarding any financing needs and the apex bank would make informed decisions, taking into consideration the current economic conditions and any other relevant information. Instead of being driven by political heaves, the RBZ could act as the voice of reason. This implies that the RBZ would technically be in charge of regulating public debt and would therefore be in control of price levels. In such a system, monetary policy will be effective in ensuring price stability.

Given the situation in the country where fiscal action is the major determinant of prices, the RBZ is rendered unable to fulfil its key mandate of price stability because it cannot engage in fiscal action. However, influencing future fiscal policy may give the central bank some degree of influence on prices but that requires high levels of coordination between the RBZ through its monetary policy and the government through the Fiscal Policy.

However, even if there is co-ordination, monetary policy will remain just a mere signal for fiscal policy and cannot take a proactive role. Therefore, a truly independent RBZ which keeps government debt in control is required to ensure price stability.

Kaduwo is an economist at Econometer Global Capital.

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