adminPerry Munzwembiri
Coming out of the worst economic and financial crisis that had threatened to destroy the world’s financial capital, policymakers in London had to employ unorthodox measures to keep their financial markets and economies afloat.
The year was 2009, and with Sir Mervyn King at the helm of the Bank of England, the UK’s central bank adopted an aggressive stance toward the economy.
It was decided to slash the country’s base rate (the interest rate at which selected specified UK banks can borrow funds from the Bank of England) to a record low of 0,5 percent and print money to inject into the economy, using £75 billion worth of quantitative easing — an unconventional type of monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply, by the UK’s Monetary Policy Commission, in order to jump-start the ailing economy affected by recession.
Across the Atlantic, the situation was no different. Wall Street, the symbol of America’s financial and economic clout, had sunk to its lowest levels in some 12 years.
Banks previously considered “too big to fail” had folded and industries were shutting down, rendering many out of employment.
As corrective measures to get back America’s economy back on track, an $800 billion economic stimulus package was introduced.
Additionally, the Federal Reserve (the equivalent of our Reserve Bank) began purchasing financial securities so as to pump money in the economy with the hopes that banks would lend out the money and spur economic recovery.
The Fed certainly wasn’t mucking around! When the programme started out, America’s Federal Reserve was injecting $85 billion a month with this asset purchase programme.
What’s the point of this history lesson and how does it relate to good old Zimbabwe you may be wondering?
Well the purpose of the illustration was to show how much of an important role central banks can play in an economy, especially when things go belly-up.
Most of the economies globally, the aforementioned two included, were facing tremendous economic strain.
High unemployment, bank failures, low GDP growth rates, and deflationary pressures in some instances became commonplace.
However, in trying to steer their economies out of stagnation, the central banks played a significant role in these countries.
Enter Zimbabwe, whose economy has experienced most if not all of the challenges stated above. What is markedly peculiar to this country is the Reserve Bank’s lack of capacity to tackle these economic challenges.
Since dollarisation in 2009, the RBZ’s role has been reduced to that of a mere supervisory agent.
A function it has not particularly excelled at either, if one was to look at the number of bank failures, for instance.
An Empty Toolbox: It is inconceivable, how one would be required to be effective in their function — whatever it may be without being equipped with the necessary tools of that trade. Such is the case with Zimbabwe’s central bank.
As economic activity has gotten subdued over the years, it would have been the central bank’s function to attempt to stimulate economic activity within the country.
Had it possessed the necessary tools, one option it could have considered was to print money and inject into the economy to boost economic activity. This would certainly have put on ice the “symphony” of voices crying out, “liquidity crisis” at every opportunity within the local business community.
After printing the money needed to stimulate the economy, the central bank could have introduced this extra liquidity through asset purchases of financial securities like bonds within the market.
Two things one may have noticed within this particular scenario. Zimbabwe is using a basket of borrowed currencies that it does not have the legal right to print. So without the ability to print money that may be needed to stimulate the economy; ideally the country should depend on export earnings from goods and services it sells to other countries.
However, with no manufacturing base to write home about, Zimbabwe’s ability to earn significant export earnings is greatly undermined, save for mining and agricultural sector earnings which fall short of the country’s requirements, as evidenced by Zimbabwe’s large fiscal deficit.
As a result, the economy has to depend on remittances from those in the diaspora, as well as other non-concessional inward flows of money.
As a direct result of us not using our own currency, Zimbabwe automatically forfeits its seignorage rights (the profit made by a government through the increase in the amount of money circulating in the economy.) Clearly then, had the country been using its own currency, the central bank would have been better equipped to handle the economic challenges we currently face.
The second, observation from the above example would be the inexistence of a vibrant capital market where financial instruments like bonds are traded.
Hence the Reserve Bank cannot utilise the conventional open market operations to buy and sell bonds on behalf of the Government, in order to increase or reduce the amount of money in the banking system.
Without a robust bond market, the apex bank is robbed of a major tool in its arsenal for tackling economic difficulties.
Legacy issues attached to both the Government and the Reserve Bank detract from efforts to re-establish the bond markets, as the RBZ learnt in 2012 through a series of failed Treasury Bill auctions.
Broke and not inspiring confidence
Another vital role central banks the world over play is that of being the lender of last resort to commercial banks.
This means that normally, the Reserve Bank would act as a type of guarantor, by being able to provide credit to commercial banks and other financial institutions to prevent them from getting insolvent, thus safeguarding depositors’ money.
This would improve public confidence in the banking system and prevent market wide “runs” on the banks. This unfortunately is not the case in Zimbabwe, where the Reserve Bank is grossly undercapitalised such that it cannot adequately perform this role.
Added to this is the RBZ’s lack of prerogative in influencing both interest and exchange rates actively on the market.
Then there is the issue of debt, that had saddled the RBZ up until the end of November 2013 when the Government announced it would assume the RBZ’s debt of around $1,35 billion.
All these are tell-tale signs of a Reserve Bank not adequately equipped to carry out its mandate.
Then there is the general distrust the business sector has over the apex bank. This largely stemming from the millions of dollars seized from corporates foreign currency accounts in October 2007 by the RBZ at the height of Zimbabwe’s economic meltdown.
* Perry Munzwembiri is a leading financial and economic analyst
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