Cen­tral bank in­de­pen­dence needed now more than ever

The Sunday Mail (Zimbabwe) - - BUSINESS -

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. Ten­der Num­ber De­scrip­tion

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