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Business Writer
THE autonomy of the Reserve Bank of Zimbabwe (RBZ) is critical in managing money supply to keep it within levels enough to adequately support the economy without hurting domestic currency, a study commissioned by the industry says.
Economists said since the central bank is vested with responsibility to formulate money policy that supports fiscal policy, the institution should be manned by highly skilled individuals with appropriate skills set, knowledge and expertise to be able to manage the expenditure habits of the central Government.
The research, commissioned by Confederation of Zimbabwe Industries (CZI) and conducted by leading econometrician Dr Carren Pindiriri, concluded that money supply and memory were the main drivers of exchange rate volatility in Zimbabwe.
The research however, also said that other variables such as the fiscal balance and trade openness insignificantly explain volatility of the exchange rate.
However, it says components of Government expenditure, in particular expenditures on capital and programmes, can also drive volatility of the exchange rate, according to research findings.
In addition to monetary targeting, the study further recommended perpetuation and strengthening of good macroeconomic management practices.
It said if the macroeconomic fundamentals continue to perform well and money supply growth is kept in check then the bubble experienced in the exchange rate growth since the first quarter of 2019 will disappear.
The overshooting exchange rate, mainly driven by confidence issues and amnesty of the previously suppressed rate embedded in expectation, will subside and stabilise if authorities stick to tight money supply and fiscal discipline.
“Furthermore, the study recommends strengthening monetary institutions, in particular, independence of the central bank, in order to build the lost confidence in the banking sector,” the study says.
In 2009, Zimbabwe adopted a multi-currency regime in order to contain hyper-inflation which reached over two million percent in 2008.
Zimbabwe experienced economic stability and a swift recovery between 2009 and 2012, with economic growth spinning from a negative of about 30 percent in 2008 to an average of 7,3 percent between 2009 and 2011. However, the multi-currency regime had its demerits.
For instance, between 2012 and 2015, the country experienced a serious deflation, characterised by low consumption, high unemployment, and low economic growth.
The study noted that 2013 general elections put more pressure on government spending and RBZ started to fund the government’s deficits using the US dollar clearing system, creating what were in effect quasi dollars and therefore a de facto local currency.
Economist John Robertson said one of the major errors Zimbabwe has made, which has resulted in rapid money supply growth, rampaging inflation and exchange rate volatility over the last two decades is the choice of its central bankers.
He said the Government made gross mistakes in appointing commercial bankers to head the central bank when in fact the portfolio is a completely different mandate that demands different skills set, knowledge and years of training.
Mr Roberstosn said the central bank should have significant authority and autonomy to decide the best monetary policy mix in the same way the effective central banks like the Bank of England and Deutsche Bundesbank of Germany do it.
“What we are doing is not compatible with the needs of the country.
“The central bank is an institution with a lot of authority and should be headed by the right professionals who have adequate skills base for challenges of a central bank. I would be worried if we carry on doing that, this is what we have suffered from” Mr Roberstson said.
The exchange rate has been very unstable since the formalisation of the local currency in 2019.
Trading of the currency was opened at US$1 to $2,5 in February 2019 but the rate has reached levels above $80 in parallel markets by August 2020.
The local currency has since depreciated by more than 25-fold within 18 months. Inflation has become rampant, showing signals of a potential return to hyper-inflation if nothing is done to the exchange rate.
Bongani Ndlovu