The role of any Central Bank in an economy is inflation-targeting and fostering macro-economic stability through the effective management of the exchange rate. However, Mark & Associates maintains a view that the institutional design of the Reserve Bank of Zimbabwe hinders monetary policy effectiveness and has identified the following critical issues;
Political independence, autonomy
Research has shown that Central Banks that plan for the long term and do not focus on short-term economic performance are more likely to maintain a commitment to low inflation.
It is very critical for the RBZ to be independent from political control as an important way to reassure the public about the Bank’s credibility.
Moreover, the degree of autonomy delegated to the Central Bank affects the design of the structure of the governing bodies and the accountability provisions.
Credibility of Monetary Policy. An analysis of inflation developments in Zimbabwe clearly reveals that a lack confidence in the ZWL is a big factor in terms of fostering macro-economic stability. .
Exchange rate developments
Credibility also refers to the degree of confidence that the public has in the central bank's determination and ability to meet its announced objectives.
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Policy changes and inconsistences have a negative impact on the RBZ’s credibility as an institution. In addition, a credible monetary policy should be implemented by an independent central bank through a rule which bounds the monetary authority's actions, avoiding the time-inconsistency problem.
Time consistent policies — A time consistent policy is one where a future policymaker lacks the opportunity or the incentive to default. On the contrary, a policy lacks time consistency when a future policymaker has both the means and the motivation to break the commitment. The fundamental insight regarding the notion of time-inconsistency and credibility, presented by Kydland and Prescott (1977), is that when economic agents are forward-looking, the policy problem emerges as a dynamic game between the government and the private sector — where the government is the dominant player, and the private sector is the follower. The New Classical approach argues that since the monetary authority has no precommitment with an announced policy and usually makes use of its discretionary powers, it will have an incentive to cheat, making the announced policy time-inconsistent and then non-credible.
Consequences for bad inflation outcomes — There is need to introduce laws so that Central Bankers or monetary authorities in Zimbabwe take responsibility and are accountable when inflation targets are not met. This will help make the public believe that they will commit to a low inflation rate. Most Modern Central Banks have legally imposed inflation targets. For example, the Governor of the Bank of England must write a letter to the Chancellor explaining why targets are not met. In Zimbabwe, nothing has happened to Governor John Mangudya even after consistently failing to meet inflation targets.
Effective communication — Monetary authorities in Zimbabwe should consistently communicate and update the public on all important developments to the public. There is need to provide consistent forward guidance on major macro-economic indicators, including the desired and expected path of interest rates, exchange rates and inflation.
Overall, we think political interests will always take centre stage thereby limiting any efforts by the RBZ to successfully foster any form of macro-economic stability.
An unresolved Albatross: The Zimbabwe debt overhang — One of the major constraints that Zimbabwe is facing today is the issue of a massive debt overhang. The predicament is that the country then fails to unlock external funding to support local production mainly because of a debt trap. This also affects the ability of the country to access reasonable cost of capital critical for financing infrastructure projects. We note that Public and Publicly Guaranteed (PPG) external debt for Zimbabwe amounted to USD12.7 billion as at end September 2023. The debt is weighing down heavily on the country’s development needs and will continue to negatively impact the country’s ability to meet the SDGs targets, especially in health, education, and social protection.
Matsika is the managing partner at Mark & Associates Consulting Group and founder of piggybankadvisor.com. — +263 78 358 4745 or [email protected]/ batanai@ piggybankadvisor.com.
