Restructuring RBZ more important than firing Gono

The ‘forced marriage’ between the Finance Minister and the central bank governor is another ‘union made in hell’. It is clear that the relationship between the two parties is as inconvenient as that of the President and the Prime Minister.

It can result in policy paralysis, reduce the appetite of international donors to commit to the revival process and extend the suffering of the ordinary Zimbabwean.

This article argues (perhaps controversially) against a reductionist approach which has so far focused on the dismissal of the central bank governor as the only route to revival and argues instead that focus should be on reforming the central bank’s financial architecture to avoid  the current centralisation of power regardless of who the incumbent is.

There are certainly many different sides to this argument and most of them seem plausible if you follow their perverse logic. The MDC and many other critics have clearly been occupied with the calls for the dismissal of the central bank governor as a sine quo non to economic revival.

The Minister of Finance is on record describing Gono as ‘Al Qaeda’ deserving to be put before a firing squad for his activities as central bank governor. Without a doubt, there are many who probably share this view based on divergent experiences of the governor’s military style approach to financial intermediation.

On the other hand, the President and many in Zanu PF, among others, strongly believe that the governor played a pivotal role in sanctions-busting through financial innovation and various Quasi Fiscal Activities (QFAs) to pay for critical supplies. It is argued that although highly inflationary, the governor’s printing press was a necessary means that saved the country from a near cataclysmic collapse.

Some international donors worried about aid fungibility having seen aid money misallocated to other state projects are believed to have made indications that they will not bankroll Zimbabwe’s economic recovery until there are reforms at the central bank (interpreted in some quarters to mean the removal of the governor).

Regardless of people’s persuasions, there is reason to argue that the herculean task of reviving the Zimbabwean economy is perhaps more important than the ‘soap opera’ distraction regarding whether certain people should be in their positions or not. If at all that was an argument with a fair determination outside political realism, wouldn’t the Prime Minister be President?

In this transitory phase, maybe we need to work with what we have until fresh elections are called and one political party is able to call the shots.

It does appear, understandably so, that the debate on this subject is overburdened by political adventurism than economic logic. It regrettably focuses on personalities than on how to develop an efficient process to optimise the central bank.

In my opinion, the debate on whether the governor should be relieved of his duties is not as important as reforming the RBZ mandate for it to optimally perform its duties in the economic revival process. Whether or not there is merit in his removal is beyond the author’s comprehension, the reality is the President appears unwilling at the moment to terminate his contract.

If the country can accept a controversial political compromise between the Prime Minister and the President to share executive powers, the same though undesirable, can be possible for the Finance Minister and the Governor. Assuming this as the reality, the Finance Minister should focus on reforming the central bank. The rest of this article very briefly discusses some of these reforms and how the central bank can be rationalised with the finance ministry.

Firstly, the broader question that needs urgent redress is whether the central bank’s current institutional set up and governance structure are optimally configured to make it execute the tasks assigned to it the public in the most efficient way.

If the answer is in the negative, the Finance Minister can propose a redefinition of the powers and limitations to the central bank’s authority. This can be done by amending the Reserve Bank of Zimbabwe Act in parliament where the Minister has a better chance of achieving his objectives that through the executive branch.

Secondly, there can be little doubt that the central bank, whether justifiably or not, was primarily responsible for the country’s stratospheric inflation due to QFAs carried out without provisioning in the state budget. However, since the announcement of the dollarisation of the market in the national budget, the powers of the central bank in printing money and engaging in QFAs have been enormously curtailed.

By default, the central bank today is not as powerful as it was before dollarisation. Its role in printing money, distributing concessionary funding or buying foreign currency on the street has succumbed to the dictates of market forces. There may be very little point in ‘beating a dead snake’, to borrow Jacob Zuma’s terminology. The central bank should now focus on fighting inflation, monetary policy and bank supervision.

Thirdly, there is a pressing need to depoliticise the position of Governor of the central bank. Although it is common in most African countries for the governor to be appointed by the President, this can be done through a nominations committee with expertise in banking.

Depoliticising the RBZ is essential in the long term due to the technical skills required in the making of monetary policy and because of the contrast between the long term effect of monetary policy and the short-term objective of politicians under election pressure.

Although perhaps still premature, the central bank can eventually become autonomous, and the powers of the governor de-centralised by function, such as the establishment of a powerful Interest Rates Committee or Monetary Policy Committee with vast experience in that area as is the case in the United Kingdom.

Reforming the mandate of the central bank will also require improving the bank’s transparency and accountability to the tax payer through a strong, bipartisan Finance Committee in parliament with real power to grill or recommend the removal of a governor in the event of abuse of power.

The decision to transfer the central bank’s accumulated losses to the government budget is a welcome one – this increases transparency of public sector accounts and strengthens the autonomy of the central bank. There is need to revise the RBZ Act to limit the extent to which QFAs can be carried out in future and introduce provisions for government support in the case of central bank losses.

Lastly, the relationship between the central bank and the central government will need to be rationalised. There are some basic rules which can be recommended for this: (a) the central bank should rely on the treasury bills issued by the government in conducting open market operations. This way the cost of monetary policy implementation will pass through to the central government; (b) any future central bank allocation of financial resources should be at market prices and only in relation to its delegated functions.

Any subsidy is best done through the budget, making the cost more transparent and monitorable; (c) the central bank should only borrow abroad for short-term balance of payment purposes, and the government should assume all exchange rate risk in any foreign borrowing by the central bank; and (d) the central bank should set aside reserves against potential losses.  

Realistically, if the MDC was unable to force the hand of government to release Roy Bennet, one of their own, until a Supreme Court decision, what are the chances they can force the President’s hand into dismissing his ‘banker’? Although not impossible, it appears unlikely that the MDC will succeed in this regard.

The Finance Minister should perhaps divert his attention from fighting personalities to changing structures and systems. Rationalising and reforming the central bank into an optimally configured institution operating with minimum manipulation from politicians, increasing transparency and accountability and enacting clear limitations to the functions of the central bank and avoiding gross misuse of resources for political expediency.

Lance Mambondiani is an Investment Executive at Coronation Financial. The views expressed in this articles are personal and do not necessarily reflect the position of Coronation Financial. E-mail: coronation.uk@btinternet.com

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