Economics of Politics: The RBZ needs autonomy
By Admire Maparadza Dube
Former Reserve Bank of Zimbabwe governor, Dr Gideon Gono, recently appeared on Zimbabwean entrepreneur and newspaper publisher Trevor Ncube’s discussion series.
Among a myriad of assertions by Dr Gono to portray himself as the saviour of a nation beset with the world’s highest inflation percentage at the time, one that caught my attention was that he pleaded lack of independence to set the tone for monetary fundamentals.
Not that I expected the RBZ, or any state owned central bank for that matter, to function totally self-regulating and without ruling government’s policy tentacles, but it is the extent to which he claimed such control obtained (and likely remains still) that left me astounded.
If he is to be believed, during his tenure he literally carried a big rubber stamp for political decisions sanitised as economics derived. Economics of politics. This lack of autonomy engenders several challenges, as will be expounded at length in this piece.
For reference, any business school course will invariably tell you the functions of a central bank under normal circumstances are monetary policies. These include, among others, to issue money (notes and coins) and ensure people have faith in notes which are printed like protect against forgery. Printing money is also an important responsibility because this has a direct bearing on inflation, which is the general rise (or decline) of prices over a given period of time.
The central bank should independently be the supervisor in chief of all commercial banks staving them off of malpractice to avert their collapse with depositor funds. It thus becomes a lender of last resort to these banks as well, if need be, when they get into liquidity shortages, maintaining confidence in the banking system.
It is also a lender of last resort to the government, borrowing on the open market through selling bonds and treasury bills (simply, loans to the central bank at a pre-set interest payable in a pre-set time) to finance government projects and needs. The phrase “of last resort” in both occasions should be emphasised.
Yet because no such independence existed (and still may not) political manoeuvring was the order of the day at RBZ. Under Dr Gono’s tenure, the most new bank licences were issued (to politically connected cronies mostly).
Such banks as Century Bank, Rapid Discount House, Sagit Finance House, Genesis Investment Bank and Trust Bank got licences to open retail banks and receive depositor funds.
It goes without saying that politics led economics in determining who got a banking licence under RBZ. Laid down stress-tests for viability were likely conducted with favour as all these new banks opened were later to shut down within Dr Gono’s very tenure.
This caused untold suffering to depositors who lost their money as well as to the fiscus in general as some of the banks received copious amounts of money as “bail outs” from the RBZ which were never recovered.
Other banks even had to be placed under “curatorship”, with some government arms being arm twisted to invest in (like the National Social Security Authority NSSA), or at least conduct business through them (like Zimbabwe National Road Administration ZINARA).
Yet the banks still went under, as indeed they should have, since they were not being run according to best banking practice which any competent and independent central bank should have picked up.
A reserve bank does inflation targeting since low inflation helps to create greater economic stability and preserves the value of money and savings. This it does by controlling how much it should print guided by complex macro economic indicator calculations that consider such hard factors as Gross Domestic Product (GDP), productivity, balance of payment, current national debt, Consumer Price Index (CPI) and the like.
Other abstract factors are considered like national objectives and poverty levels. The ultimate aim is such that there should be just enough money to stimulate and sustain economic growth, therefore improve people’s welfare, achieve national economic targets like growth and unemployment, as well as control money in circulation without negatively affecting productivity such that inflation ensues. Nothing more.
Now, under Dr Gono the RBZ became almost a pseudo Finance Ministry unto itself as its mandate morphed beyond monetary policies to include fiscal operations as well.
This is a concern because the firstly the Finance Ministry, to which the RBZ reports to, should ordinarily take care of economic affairs, investment, finance planning, resilience, sustainable development and has responsibility for ensuring that the public finances are maintained in a satisfactory condition and for monitoring fiscal and economic performance.
The work of the Ministry is pursued partly through its oversight responsibility for resource allocation in the budget (capital and recurrent) for implementation of the work programmes of other individual Ministries.
Secondly, this then meant the political meddling puffed up an arm of the Finance Ministry into the biggest “Ministry” in the land. Imagine how ridiculous it would sound if the Zimbabwe Revenue Authority (ZIMRA), which is another of many arms under the Ministry of Finance, was to be equally aggrandised to levels higher than the Ministry and it begins to handle its own responsibilities to collect money through taxes for the Consolidated Revenue Fund and then also conducts fiscal policy? The Commissioner General of ZIMRA becoming so powerful his reports chart the macro-economic course for the whole nation? Ridiculous.
At that time the RBZ became so influential it took roles of releasing of funds to other Ministries/Departments in accordance with parliamentary allocations, determination and presentation of annual estimates of revenue and expenditures, preparation of development plans, strategies and projects, monitoring of economic performance, preparation of economic forecasts and analytical reports, providing advice to Government on economic and financial matters, charting the direction of macroeconomic policy among others. All these are ordinarily Ministry of Finance functions.
The governor’s monetary policy announcement became the indicator of the Mugabe administration’s policy direction and drowned out the more comprehensive fiscal policy by the Minister of Finance.
Dr Hebert Murerwa who was the Minister of Finance in 2003 when Dr Gono’s two terms began had to be removed from the post as they had frictions over this, with his supposed subordinate. The Deputy Finance Minister, Christopher Kuruneri was then promoted to substantive Minister after Dr Murerwa left. He too only lasted a record two months before swapping that plush office for a jail cell and Dr Murerwa being recalled to his former post.
Dr Murerwa’s second tenure was to last under three years and succeeding Samuel Mumbengegwi lasted under a year. Tendai Biti lasted a “long” four years as the Dr Gono’s “boss” as he was an imposition of the Government of National Unity (GNU), where the Government’s two belligerent political parties of Zimbabwe, (ZANU PF) and (MDC) came together to form one government to turn round the country’s economic mess, in which the RBZ is very culpable.
So politically powerful became Dr Gono that he was colloquially referred to as “The Prime Minister” in corridors of power. Let it sink in that Zimbabwe is a republic with an Executive President as its head and has no post of Prime Minister in a legal sense, but such had become the all powerful RBZ governor because of umbilical connection the RBZ had developed with the ruling political party.
So here we observe that the RBZ became powerful politically, and Dr Gono will have us believe he worked under political instruction. By insinuation, he indicated to Ncube in the discussion that his hands were tied and went on to quote sections of the RBZ Act [Chapter 22:15] and the Finance Act [Chapter 23:04] that gave power to the president to order the fiscal activities.
It is neither here nor there if he had become politically powerful or a dependent appendage of politics, the final analysis will always be that him and the RBZ eventually practiced economics of politics as the lack of autonomy or the political interference (whichever applied) led to wrong decisions which exacerbated Zimbabwe’s dire economic situation.
In the interview Dr Gono suggested that an RBZ governor should be picked by his peers and report to parliament not to the Finance Minister. Though this is well intentioned as its the august house anyway that sets the laws of the land and thus likewise can supervise the land’s purse holder in form of RBZ, I do not see any leader diluting his or her power and allowing parliament to usurp such a central institution from their grasp. Notwithstanding the fact that the very parliament may not have its sympathies with him or her as it may be made up of opposition party members regardless of their composition or their numbers.
Indeed, at some point in the discussion with Mr Ncube, Dr Gono confesses that in 2009 his governorship of the economics institution became a very political topic.
Under the tenure of the GNU, MDC felt the ZANU PF was now using the RBZ to further ruling party interests at the expense of national wellbeing. As such they wrote up a list of 29 demands which they wanted rectified threatening to pull out of the unity government. Chief among those was the demand that “Gono Must Go.”
Politics had picked Dr Gono for governorship. He says he was offered the role by the current president of the Republic of Zimbabwe who was acting Finance Minister at the time, H.E. Emmerson Mnangagwa. Politics sustained his office and now politics threatened his tenure.
Insofar as he survived this scare it is a given that his decisions henceforth became political appeasements more than guided by economic indicators. This puts paid to my cry that the RBZ needs more independence than it currently enjoys.
History has recorded these decisions which Dr Gono took during his two term office tenure from 2003 to 2013 and when looked at from an economics perspective truly have no precedent before and have had no follower since.
At the time they became known as “quasi-fiscal activities” to give the political actions a modicum of economics dignity. Mind you this was the time of impositions of sanctions by the western nations on the Robert Mugabe administration as punishment for land appropriations.
This was also the time the newly resettled farmers were agitating for governmental assistance to set up their new found farming “business.” By insinuation, Gono indicated to Ncube in the discussion that money was printed, regardless of economic indicators, to fund “farm mechanisations” at the instruction of the then president.
There is a reason why In April 2016, the International Monetary Fund (IMF) in its conference entitled “Rethinking Macro Policy” the general consensus found that central banks should retain full independence with respect to traditional monetary policy. Technical decisions need technical reasoning hence should remain undiluted as technical processes.
After all, politicians are driven by need to please supporters, with one eye always on remaining in power (plus the ever-tempting desire to line their own pockets at the expense of their citizens’ purchasing power). Their assessment is not always for the economy but for personal survival.
This has led to brutal hyperinflation in countries like Argentina, Hungary, pre-WWII Germany and indeed Zimbabwe where Government figures show Zimbabwe’s peak inflation rate was 79.6 billion percent month-on-month and 89.7 sextillion percent year-on-year in mid-November 2009.
Hyperinflation only ended the following year with the adoption of the US dollar. It is paramount to note that US dollar fundamentals are beyond the purview of RBZ but of the US Federal Reserve. A massive indictment of the former.
There is a reason why nations that have privatised their central banks, leaving limited or no state ownership in them, seem to do comparatively better than state owned ones at managing monetary matters. Simply, they act in the interest of their mandates with miniscule and manageable state influence, if any.
Examples of privately owned central banks include the South African Reserve Bank which was privatised from its inception in 1921, the Reserve Bank of New Zealand nationalised in 1935, Bank of France and Bank of England both nationalised in 1946, Bank of Spain1962, Bank of Portugal 1974, National Bank of Angola 1975 and the National Bank of Austria privatised in 2010, among many others.
If RBZ cannot be privatised at least it should be rid of economics of politics and adhere to its true mandates and use that independence to fulfil them. The instruments it deploys in such autonomous conditions, and the safeguards that accompany them, will be commensurate with the nature of the challenges it faces, not to for political expediency. As such, it is crucial that the central bank is at all times autonomous, transparent and accountable in its actions, to economics, not to politics.
Admire Maparadza Dube, Financial Analyst, Banker, MSc, CFA, PhD Student. He can be reached on [email protected]