Zimbabwe: Central Bank Autonomy, Quasi-Fiscal Activities

The International Monetary Fund (IMF) has warned the Zimbabwean Government that it needs 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 the current monetary crisis is as a result of failure to detach monetary policy from government policies. The government has over the years relied on the central bank's function of quantitative easing (unconventional methods of printing money or increasing money supply) to plug its consumption induced budget deficits and this has increased its appetite to spend beyond tax revenues. Consumption and budget deficit increased from US$3,9 billion and US$185 million in 2014 to US$7,8 billion and US$2,7 billion respectively in 2018.

The widening gap between collected tax revenues and expenditure have been funded through the central bank overdraft facility and domestic borrowing through issuance of Treasury Bills (TBs). By December 2018, Zimbabwe's domestic debt stood at over US$9,5 billion (Before rebasing). That figure included out of statute (unconstitutional) borrowings of more than $2,3 billion through the RBZ Overdraft facility.

The functions of the Reserve Bank of Zimbabwe (RBZ) according to the RBZ Act, Chapter 22.15 are to formulate and implement monetary policy directed at ensuring low and stable inflation levels. To maintain a stable banking system through its banking supervisory and lender of last resort roles, issue bank notes and coins and manage the country's gold and foreign exchange assets. However, the contentious function of the central bank relates to its role of acting as a banker and financial adviser to, and fiscal agent of the State.

It is this function that has led to conflation between monetary policy and government policy. The central bank has over the years been involved in public sector expenditure programmes such as the procurement of farming inputs, petroleum, medicine, grain and processed food, farm implements and electricity among others.

In 2005, the central bank launched the Agricultural Sector Enhancement Productivity Facility (ASPEF) in order to boost agricultural production. Farming inputs and implements worth more than US$114 million meant for the programme were looted and failed to improve production as it fueled corruption among the elite.

In the same year, Operation Maguta was launched with over US$41 million being channeled towards rural households, winter and summer cropping projects. In April 2005, various local governments accessed at least ZW$1 trillion under the central bank's Parastatals and Local Authorities Reorientation Programme (PLARP).

A huge chunk of the PLARP loans were not paid for up to this day. The Farm Mechanization Programme followed in September 2007 with the objective of mechanising agriculture production and improve crop yield per hectare. The Basic Commodities Supply Side Intervention (BACCOSSI) was also introduced in the January 2008 to alleviate the acute shortages of goods in supermarkets through giving households food hampers. Most of these programmes guzzled millions of dollars but failed on implementation as the projects were politicised, looted, mismanaged and widened beyond scope thereby increasing broad money supply.

For the past three years, the central bank has been running several support schemes such as small scale gold and tobacco production, boosting tourism, diamond production, cross border trade and export incentive schemes among others at the expense of the country's financial institutions such as commercial or merchant banks. To the central bank's credit though, contribution from small scale producers in gold and tobacco have placed Zimbabwe back on the map with gold deliveries to Fidelity Printers and Refiners (FPR) increasing by 16% to 24,8 tonnes in 2017 and notched an all-time high of 33,2 tonnes in 2018. The same effect was also felt in tobacco farming where 189 million kgs of the golden leaf were priduced in 2017 and a record of 253 million kgs in 2018. Small scale producers now account for the bulk of the gold and tobacco deliveries in Zimbabwe.

Calls for the independence of the central bank have been growing locally due to the impact of the central bank's quasi fiscal activities which have fueled growth in broad money supply, domestic debt, and inflation rate. They have also created pricing distortions in the market with multi-tier pricing persisting till today. The central bank often points that it carries out borrowing on the local market to plug the budget deficit hole at the behest of the government. There are different variations of central bank independence in Africa the world over. Most central banks do not have absolute independence even though their monetary policy framework may be autonomous.

The South African Reserve Bank (SARB) enjoys a considerable degree of autonomy in the execution of its duties. In terms of section 224 of the South African Constitution enacted in 1996, "the SARB, in pursuit of its primary objective, must perform its functions independently and without fear, favour or prejudice, but there must be regular consultation between the Bank and the Cabinet member responsible for national financial matters".

In June, SARB rejected calls to pour billions of rands to bail out ailing parastatals such as Eskom, South African Airways and South African Broadcasting Services (SABC) and print money to induce economic growth as called for by the government.

In England, the government granted the Bank of England operational independence on monetary policy in May 1997. The decision to give operational independence over monetary policy to the Bank of England was a result of concern about the short-term politicisation of economic decisions by the government. There is no doubt that central bank independence is not favoured by many governments and that countries with less independent central banks have higher inflation rates and high domestic debt levels.

The benefits of an autonomous central bank especially on monetary policy are to do with being able to manage inflation and preserve investment value in the economy through control of credit creation. Naturally the government leadership is motivated by short-term political gains of boosting employment and economic production through increasing government expenditure and borrowing.

This naturally needs checks and balances especially in the case of Zimbabwe where government expenditure has fueled inflation, corruption and looting by the elite, private sector disengagement and economic decline to the detriment of ordinary citizens.

The Zimbabwean government announced the much awaited Monetary Policy Committee (MPC) on the 10th of September 2019. However the committee seems ineffective in curbing money supply as it reports directly to the central bank governor. Broad money supply (M3) has grown to over ZW$17,1 billion, up 16% from the June figure, up 74,9% from October 2018. The central recently announced that it will introduce new notes and coins into the economy even though the actual quantum is unknown at this point. Indications are that up to ZW$2 billion notes and coins will be injected into the economy gradually.

Central bank quasi fiscal activities bring in distortions in the market as they compete with commercial banks and micro-finance institutions in providing funding to the productive sector. Although the bank justifies these through positive outcomes such as gold and tobacco production, the apex bank should concentrate on creating a conducive environment characterised by efficient banks, which in turn offer facilities at reasonable rates to productive sectors as opposed to a situation where the banks and the central bank are competing in the same market. Quasi-fiscal operations result in excessive growth in money supply, which has an effect of putting pressure on prices of goods and services.

There is a strong case for the independence of Zimbabwe's central bank considering the harm caused by excessive money printing and conflation between monetary policy and government policy for short-term political motives. The central bank should concentrate on regulating the financial services sector and creating an environment that banks can thrive, while maintaining low inflation levels.

Conflict of interest is now rife with the central bank engaged in quasi fiscal activities such as structuring fuel deals and printing electronic money to plug the government budget deficit while at the same time trying to control growth in money supply through increasing interest rates and printing limited amounts of notes and coins.

Bhoroma is economic analyst. He is a marketer by profession and holds an MBA from the University of Zimbabwe. -- vbhoroma@gmail.com or follow him on Twitter @VictorBhoroma1.

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