ZIMBABWE will find it challenging to end the central bank’s quasi-fiscal operations as advised by the International Monetary Fund (IMF) unless there is a strong political will to do so, economic analysts have said.
The IMF last week advised the government to cut the Reserve Bank of Zimbabwe (RBZ)’s role in crafting monetary policies to just its core functions, after the local currency depreciated by more than 70% year-to-date.
According to the IMF, the increase in money supply is being aggravated by quasi-fiscal activities at the central bank, which the government has used to fund its bloated budgets.
Zimbabwe has previously received this recommendation.
American economist Steve Hanke contended in 2022 that the central bank’s quasi-fiscal actions, which had led to a national debt of more than US$20 billion, were primarily responsible for the currency distortion observed in both the official and parallel forex markets.
Local economic analyst Victor Bhoroma told Standardbusiness that limiting RBZ to its core functions was a behemoth task for Zimbabwe given the complexity of the countries governance structure.
Bhoroma said it would have been achievable if the central bank’s monetary policy was divorced from political interference or from political objectives.
“Given what is on the ground, it is merely a blueprint; it is merely a recommendation on paper,” he said.
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“But to be implemented, it requires a lot of political will in order to achieve even a single reform.
“For example, you look at foreign travel.
“The amount of the value of motor vehicles that are bought where expenditure is cut, then there is no need for parallel funding through the central bank or abusing the central bank’s overdraft facility, which should be limited to 20% of the previous year’s collected revenues.”
He added: “It also means that the central bank will be able to end its quasi-fiscal operations that obviously are intertwined with political objectives.
“So, if all those things are done, then we can arrive at a situation where commercial banks become the ones that determine the foreign exchange rates.”
Bhoroma said the central bank is overreaching in its regulatory function, making the advice unattainable as well.
According to him, the RBZ is in charge of the government’s parallel funding, which effectively generates a lot of money in addition to the quasi-fiscal operations.
“That means that it cannot be achieved and it is not just about the reforms only. It needs political will; it needs a raft of reform in terms of government structure, a way its expenditure is aligned and the priorities and everything,” he said.
Another economic analyst Tapiwa Mashakada said it was not possible to kill the inflation dragon as long as a weak currency coexists alongside a strong currency, as is the case in Zimbabwe.
Under such circumstances, he said monetary policy will not work because the transmission mechanism is mudded.
The existence of the Zimbabwe dollar alongside the United States dollar breeds a fertile ground for arbitrage, expectations and inflation.
“The laws of demand and supply affect factor markets, financial markets and any other market,” Mashakada said.
“Now the role of policy making is to deal with deviations from the general equilibrium,” he said.
“These deviations may be occasioned by spurious assumptions of a perfectly competitive economy, natural disasters, expectations and even political economy.
“Policy and regulatory measures are then used to restore price equilibrium.
“Why is the Reserve Bank not doing that?
“|I argue that the current exchange rate misalignment, price increases and currency depreciation is primarily caused by monetary policy failures, commissions and omissions.”
However, while political will remains the cornerstone of resolving the RBZ puzzle, economic analyst Vince Musewe said the country should do what it works.
“The RBZ will continue to play a central role in determining monetary policy and also setting the pace on currency management, banks regulation and access to offshore credit for the business sector,” Musewe said.
“Zimbabwe’s economy is not in trouble because of the RBZ but because of structural issues and lack of political will to do the right things.
“So, I don’t agree with their paradigm which essentially emanates from a neo classical economics paradigm. We must simply do what works for us.”
