It is of great development to give a degree of independence to the Reserve Bank of Zimbabwe in order to fix monetary crisis facing our country

 

By Clement Mupfunya

 

The benefits of Central Bank independence from political interference are undeniable. In countries that have independence central banks have experienced low inflation and currency stability.

Furthermore, independent central banks contribute to national debt sustainability and lower the risk of fiscal crisis.

The independence of the central bank is important because researchers have found that the more independent a central bank is, the lower the inflation it allows without injuring economic growth and employment objectives.

Price stability is the major goal for the monetary policy of most central banks. The motivation behind this objective is the widely studied notion that inflation above a certain threshold is detrimental to the real economy.

Developing countries are most vulnerable to the negative effects of high inflation. Central bank independence that is, allowing central bank to control monetary instruments without political interference becomes the key institutional recipe to fight inflation.

When governments have discretionary control over monetary instruments, they can prioritize other policy and goals over price stability throughout their tenure.

In particular, after nominal wages are set, politicians may be tempted to use monetary policy to produce short-term boosts in employment and output for electoral purposes leading to raising inflation in the economy.

 

 

To overcome the time inconsistency of commitments to price stability and their inflationary bias, the article advocate for enforced commitments, that is rules monetary policy rather than discretionary monetary policy. Thus, advocating for delegating monetary policy to an independent central bank.

Once central bank is insulated from political pressures, commitments to price and currency stability can be credible, helping to maintain low inflation and a stable economy.

Following this idea of giving a degree of independence to the central bank a considerable policy consensus grew around the potential of central bank independence to promote inflation stability and a growing economy.

The greater motivation to grant independence to the Reserve Bank of Zimbabwe is the need to avoid political pressures to pursue expansionary policies that cause inflation.

This was witnessed by quasi-fiscal activities that were implemented in 2006 and 2007 which lead to four-digit inflation from that period.

This article reinforces the importance of having an independent central bank as an effective mechanism to reduce inflation and to have an economic climate that attracts foreign direct investment (FDI). One thing that the government must take note of is that, investors are not gamblers because, to a gambler, investing is a game of chance.

 

 

To an investor, investing is a game of skill and to individuals who turn their money over to someone else to invest, investing is often a game they don’t want to learn. Therefore, FDI are highly skilled investors that first study the economic environment before engaging in any business.

Whether the Reserve bank of Zimbabwe pursues conservative or liberal policies, its policy effectiveness remains linked to its degree of independence from political interference.

In countries like ours Zimbabwe and among others which include Venezuela, Argentina, Eswatini and many more their erosion of central bank independence due to constant political interference has led to sustained periods of relatively high inflation, unemployment – and lack of confidence in their financial sectors.

It is also clear that there is a negative relationship between central bank independence and monetary finance of fiscal deficits. This boils down to the fact that less independent central banks are more subject to political pressures and interference leading them to finance the government’s fiscal deficit more often and in greater amounts.

Due to financial instability within developing countries particularly African economies, there is greater need to improve social and economic standards of living. Africa is the richest continent in the world but it is the poorest continent regardless of its resources.

Africa is poor not because the world has denied the continent the markets and to compete, far from it. Nor is Africa poor because the necessary development and technical expertise is unavailable internationally.

Why then has the economies in Africa lagged behind other developing areas when its people work hard and the continent is blessed with abundant natural resources?

 

 

According to this article, the answer is not what most people think. Why Africa’s people are poor is because their leaders have made this choice. The policies that African leaders implement is for themselves to benefit rather than the whole African population.

Hence, it is critical to establish independent institutions particularly in the financial sector so that the policies they implement are not politically related.

According to President Paul Kagame of Rwanda, he said, “It is impossible to get governments to do rather than say, something unless it is in their direct interest”.

According to this article, it is of great sense to give a certain degree of independence to central banks, especially in African countries that face a leadership crisis.

In normal senses, there is no reserve bank governor that can approve quasi-fiscal operations to be carried under central banks.

This is because of the economic consequences of such activities. For more information about quasi-fiscal activities check article: Economic harmful of quasi-fiscal operations by economist Clemence Mupfunya: See link https://zimbabwedigitalexpress.com/?s=Clemence+Mupfunya

A central bank is said to be independent in the sense that monetary policy and related decisions are made autonomously and are not subject to approval by the government.

 

 

However, its governor will be appointed by the President and must be confirmed by the parliament’s finance committee. The central bank should be accountable to the public and parliament – not the government.

The Reserve Bank of Zimbabwe is under the finance and economic development ministry and as a result – it takes orders from the government hence due to the reasons outlined in this article, it is of great development to give a degree of independence to the Reserve Bank of Zimbabwe in order to fix monetary crisis facing our country.

Economist Clemence Mupfunya is a correspondent for The Sunday Express. He writes in his personal capacity. Contact him at (27) 67 208 2236.

 

 

 

 

See Also

Impact Of High Interest Rates On The Economy: Case Of Zimbabwe

 

 

SADC Needs Not To Be Desperate For Direct Foreign Investment: Clemence Mupfunya

 

 

Inflation Targeting As A Monetary Policy Tool To Reign In Currency Crisis In Zimbabwe

 

 

Effects Of Currency Fluctuation On A Developing Economy: Case Of Zimbabwe

 

 

Inflation Is Spiking In Zimbabwe (Again): And Why High Interest Rates Aren’t The Answer

 

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