The RBZ problem and why Mnangagwa failed to improve Zimbabwe’s economic prospects in his first term

By Martin Majaji


It is now more than 5 years since President ED Mnangagwa assumed power in 2017 with a mandate from his backers to improve the country’s economic fortunes, the nemesis of his predecessor, RG Mugabe. The reality on the ground, however, is that the economy in all objective measures, is in a far worse position than when Mnangagwa assumed office. With all the goodwill that the Mnangagwa administration initially received internally and internationally, why have all the efforts to bring life into the economy all but failed, to the extent that many now strongly believe we are staring conditions similar to the 2007 economic implosion? Where has the Mnangagwa administration gotten it wrong?

The role of the Reserve Bank of Zimbabwe

On the economic front, the single most important reform element that the new Mnangagwa government desperately needed that would have immunized the country from ever relapsing into the hyperinflationary scourge of 2007, was the policy reform on the operational mandate of the Reserve Bank of Zimbabwe (RBZ). The RBZ’s operational mandate needed to be aligned to international best business practices if the country was to cease being the “economic black sheep” of the region. All efforts by the Mnangagwa administration to turn around the Zimbabwean economy have been futile, and of no effect, because RBZ’s operational mandate maintained the status quo. If the 2nd Republic had genuinely intended to usher in a new economic trajectory for the country, the starting point was supposed to be central bank reform. There can be no economic growth without macroeconomic stability.

All the economic challenges the country is facing can almost all be traced right to the door-step of the RBZ. Memories from our recent economic history vividly confirm that the country’s economic fortunes are in a way directly tied to the operations of the RBZ in the economy. The more the RBZ gets directly involved in the Zimbabwean economic landscape the more the macro-economic conditions have worsened. On the other hand, the country’s economic fortunes have improved at a time the RBZ had very limited roles to play in the economy.

At the height of the 2007 economic implosion, the RBZ had virtually taken over all key aspects of the Zimbabwean economy, from financing all government operations, procuring all key imports, providing funding to companies, to selling products in short supply directly to the public under the so-called BACOSSI programme. The economy worsened with each new measure taken by the RBZ towards more direct involvement in the economy. By the time the new Government of national Unity (GNU) was consummated in 2009, the government was bankrupt, with only USD5 million in its coffers, and the national currency, the Zimbabwean Dollar, totally rejected by the market.

The GNU adopted an economic policy position anchored on the full dollarization of the economy, as a result, the RBZ became a ceremonial central bank, only existing in name. It was during this period of hibernation or total inactivity by the RBZ in the local economy, that Zimbabwe recorded a period of the most rapid real economic growth since independence, albeit from a low base. The 4-year period from 2009 to 2013 registered average real economic growth rates of over 8% and the country ran balanced budgets and surpluses over the period. Inflation was close to 0% and there were no forex shortages to pay for fuel, electricity, wheat and other essential imports. There were no USD physical cash shortages, with ATM’s dispensing up to USD10 000 notes from a single withdrawal.

The end of the GNU in August 2013 came with the resurgence of the RBZ. The RBZ quickly reintroduced exchange controls and the allocation of foreign currency for so-called key national requirements, it invented Bond coins and notes and legislated par value for Bond notes to the USD. The more the RBZ extended its tentacles into the economy the more the economic gains of the GNU period were quickly eroded and reversed. Once again forex shortages became the order of the day and the notorious fuel queues resurfaced. The reversal of economic fortunes culminated to RG Mugabe being recalled by his party, and one of the main accusations levelled against him was failing to manage the economy with too many “criminals” around him.

The new Mnangagwa government, ironically referred to as the 2nd Republic, quickly reverted to the old ways, it continued to empower the RBZ, which to this day, has reverted to an almost mirror image of the 2007 Gono led RBZ. The RBZ now funds command agriculture outside the fiscal budget framework, controls most of the forex generated through the so-called “surrender requirements” from exporters, provided forex for fuel, electricity, wheat and other critical imports.

By the time the Finance Ministry suspended year on year inflation reporting in August 2019, we were already stuck in the most painful and notorious economic condition, called stagflation! Official recorded inflation was 78%, accompanied by a negative economic growth rate of -6.5%, a double whammy of economic pain. There was some economic growth recovery after the end of the Covid pandemic, however, in June 2023, we now have probably the highest inflation rate in the world if measured in ZW Dollar terms. Countries at war, the DRC, Somalia, Ukraine are doing much better.

RBZ is a direct extension of the government

Bold reforms of the operational mandate of the RBZ are urgently required if the government is to turn around the Zimbabwean economy and usher in a new era of stable macro-economic conditions necessary to bring in direct domestic and international investments. This will bring about sustainable economic growth, employment creation and poverty reduction. The new government to be ushered in after the August 2023 elections must bring in reforms on the operational mandate of the RBZ, and legislate the laws governing the central bank at the constitutional level.

The best business international practice is to legislate the independence of the Central Bank in the constitution. In south Africa, the South African Reserve Bank (SARB) is a constitutional Chapter 9 Institution, with its operational mandate and independence guaranteed by the constitution. On the other hand, the RBZ is governed by a mere act of parliament, which can easily be amended and changed to suit short term political agendas.

According to the IMF country representative to Zimbabwe; Patrick Imam, speaking in 2019, “The Central Bank (RBZ) is a mirror image of what the government does”. In other words, instead of the Central Bank helping to contain the negative effects of overspending by the government and reduce overall damage to the economy, the RBZ acts in tandem with the government and magnifies the problem instead of helping to contain it. According to the report by the Auditor General, in 2017/18 fiscal years, the government spent USD3.2 billion on Command agriculture outside the fiscal budget framework.

The RBZ facilitated this expenditure by creating liquidity in RTGS Dollars that increased money supply by 86%. If the RBZ had an independent operational mandate, the government would have been forced to source the USD3.2 billion on the open market, interest rates would have shot through the roof, protecting the local currency from further depreciation and punishing the government’s irresponsible spending through high borrowing costs. This would have protected the value of depositors’ cash deposited with banks.

A very good example of how an independent Central bank helps to contain and cushion fiscal mistakes committed by the government is that of the SARB. The south African government via its 100% owned Eskom, racked in R450 billion of new debt as Eskom was building its two new power stations and costs skyrocketed beyond initial budgets. Some gullible ANC politicians then proposed that the SARB take over the Eskom debt, in other words, monetise the debt.

If the SARB was not independent, then they would have been forced by the government to print R450 billion of new money to pay-up all Eskom debt holders. The immediate ramifications would have been a massive spike in inflation and steep depreciation of the Rand as money supply shoots up through the roof. If the SARB was not independent, South Africa would be in similar economic territory as Zimbabwe, only an independent Central Bank has been South Africa’s saviour.

The RBZ is not providing the necessary cushion to government’s irresponsible spending, instead the RBZ facilitates government’s reckless spending and hence magnifying such effects onto the economy, this explains the current hyperinflationary conditions, the massive depreciation of the new Zimbabwe Dollar, forex shortages, sluggish economic growth and record unemployment sending the bulk of the population to fend for themselves in the streets. The economic situation will get worse as long as the RBZ is a direct extension of the government, with no institution in place to provide a cushion for irresponsible government expenditure.

Essential and urgent Central Bank reforms

The following reforms are urgently required to change the governance and the operational mandate of the RBZ to ensure sustainable macroeconomic stability in Zimbabwe and arrest the recurrence of hyperinflation, forex shortages, deep currency depreciations and mass unemployment.

Craft legislation for an independent Central Bank at the Constitutional level

The Minister of Finance of the newly elected government must immediately initiate new legislation for an independent Central Bank with the sole mandate to maintain the value of the local currency and the stability of prices in the domestic market. In line with international best practices, the Central Bank will follow a targeted inflation regime, where it sets a publicly known inflation targeted range that must be maintained at all costs. In South Africa, the SARB maintains an inflation target of a CPI rate between 3% and 6%. If inflation breaches the upper limit, the SARB is forced to increase interest rates to tighten money supply growth until inflation falls back into the targeted range.

A Central Bank which is not independent can bring a lot of harm to an economy. The RBZ in its current operational structure, has the power to divert all goods and services produced in Zimbabwe to certain individuals or sections of society by simply increasing the quantity of money, albeit, at a cost of very high inflation.

Capital formation or investment (a necessary precursor to economic growth) cannot happen without savings since people are discouraged from saving when money is losing value fast. Instead, high inflation drives up consumption to the detriment of savings. This discourages wealth creation through direct local and foreign investments and explains the sluggish economic growth rates and high unemployment levels we are currently experiencing.

Scrap the surrender requirements from exporters; the RBZ and government must source forex on the open market

The RBZ is the only Central Bank that forces exporters to cede a portion of their export proceeds to itself in the SADC region. Instead, the RBZ should be a player in the forex market, buying forex to build its reserves and selling forex into the market to stabilize the Zimbabwe Dollar exchange rates.

By insisting on forex surrender requirements, the RBZ is sending a clear message that it does not have confidence in the domestic forex market that it regulates and supervises. If the RBZ expects everyone else to buy forex on the market using ZW Dollars, why does it not create confidence by demonstrating that everyone, including government, can buy forex openly on the market? Business confidence can only be created through real actions by the authorities. Surrender requirements incentivizes the export of gold via illegal channels as revealed in the Gold Mafia documentary. This risks the country being ‘grey listed’ again.

In South Africa, the SARB allows all exporters to receive all their forex proceeds into their CFC accounts for up to 180 days. However, any expenditure by the companies must be made in the Rand currency, this forces companies to liquidate their forex deposits in the forex market and create demand for the Rand.

The RBZ must cease being a banker to government

To help reign the government’s insatiable appetite for funding for fiscal expenditure, reforms must be instituted to immediately put a stop to the unprecedented and harmful practice of government’s direct borrowing from the Central Bank through the Reserve Bank overdraft. Firstly, the RBZ does not have a balance sheet to lend the government from. Secondly, the Governor of RBZ cannot decline a loan requested by his boss, the minister or secretary of Finance.

During the GNU era, CBZ was the banker to the government. It is not international best practice for government to borrow directly from the Central Bank, it is a recipe for disaster, as the central Bank becomes in essence, an extension of government. The Ministry of Finance must have its own funding team that raises funding for government from the financial markets.

In South Africa, The SARB is not a banker to the South African government, the Department of Treasury and South African Revenue Services (SARS) have bank accounts with South African commercial banks.

Fidelity Refinery must cease being a subsidiary of RBZ

Is there any good reason why a Central Bank should be the main player in the gold market besides the fact that it was an inherited structure from the colonial era war government of Ian Smith? The South African gold market was the biggest in the world for centuries, but the South African Reserve Bank was never the main player in the gold market. It only regulates the trading of gold in the financial markets and trades gold from the financial markets to build its sovereign forex reserves portfolio. Rand Refinery is jointly owned by the biggest gold mining companies in South Africa, and it refines gold for the mining companies and the refined gold is openly traded in the financial markets via the banks.

The problem with a central bank buying gold directly from producers, is that nothing stops the RBZ from simply printing money to buy all the gold produced in the country. The RBZ does not have a balance sheet or funding to buy gold. Could this provide the answer to the uncontrollable growth of money supply levels which have been recorded every year at a time the government claims it is running balanced budgets? The increase in gold produced in the country becomes an economic curse, as the RBZ just prints more money to buy the gold fuelling more inflation and creating macro-economic imbalances.

Forex must be priced and allocated through an efficient market

According to the IMF country representative to Zimbabwe; Patrick Imam speaking in 2019, “In Zimbabwe we price forex incorrectly. We export over US$5 billion worth of goods, but Malawi exports about US$400 million but there are no fuel shortages, access to pharmaceutical products challenges, and so on. The problem with Zimbabwe is not foreign exchange, it is that of pricing foreign exchange incorrectly. The foreign exchange is under-priced, for example subsidies to fuel and the result is that we never have enough foreign exchange as people will buy fuel and smuggle and sell it to other countries.”

Even countries recording very high economic growth rates such as Rwanda, Ethiopia and Kenya generate less forex than Zimbabwe, yet their economies are not hamstrung by forex shortages and currency induced hyperinflations. These are the naked facts that the new  incoming government cannot afford to ignore, bold decisions are needed, doing the same thing over again and expecting different results is the definition of insanity.

The RBZ should not be involved in the allocation and pricing of forex, it has totally failed in this regard. Rather the RBZ should regulate and supervise the forex market within the banking sector in line with international best practices. The RBZ can also control what can be paid out of our forex by running an efficient exchange control regime which limits the demand for forex by managing exchange control approvals for what can be paid for externally, but leaving the pricing of the forex to the markets.

Uncontrollable money supply growth is the root cause of macro-economic instability

The more than 100% growth in money supply from January 2022 to January 2023, at a time when real economic growth is less than 4%, is the root cause of the current macro-economic implosion that has sunk the country into hyperinflation and brought us nearer to the conditions of 2007.

The creation of money by the RBZ to buy gold from producers and creating money to pay for surrendered USD export forex receipts and maybe the monetisation of printed cash to fund election campaign projects, have fuelled uncontrollable money supply growth and given birth to hyperinflationary conditions that have brought immense suffering to the populace.

The RBZ has responded to the massive money supply growth it has created itself, by depriving the citizens of adequate ZW Dollar cash notes needed for transaction purposes and, in the process, creating arbitrage opportunities for the parallel market trading of ZW Dollar notes, inducing more suffering to vulnerable citizens. Limiting notes in circulation, maintaining small denominations for notes, and setting very small transaction limits for electronic cash transfers is no panacea to the harmful effects of the massive money supply growth. It just makes it more difficult for citizens to transact in the ZW Dollar, exacerbating its rejection by the market.

The solution lies in a truly independent Central bank mandate which provides a cushion to the economy for irresponsible government expenditure. There are many countries with debt to GDP ratios way higher than that of Zimbabwe, but that high government debt is not irresponsibly monetised into the economy because of the existence of independent central banks.

The independent central banks ensure that high government borrowing does not become inflationary by managing interest rates and tightening money supply growth to ensure continued macro-economic stability irrespective of high government spending. This is what Zimbabwe desperately needs out of its central bank, an RBZ acting independently for the sole purpose of maintaining stable domestic prices of goods and services and maintaining the value of the national currency.

Without the above reforms, dollarization is the only option to save the economy from an economic implosion similar to that of 2007

There have been concerted efforts by the RBZ and some politicians to spread fear about the effects of dollarization. They claim dollarization will make the economy less competitive as the USD is a stronger currency, leading to company closures and job losses. The reality on the ground reflects this narrative is far from the truth.

During the peak of hyperinflation in 2008, most manufacturing companies had ground to a complete halt. Their domestic trading capital had all been depleted and lost to hyperinflation. Most companies did not have forex needed to buy raw materials, spare parts, or acquire new equipment or machinery to be competitive. Dollarization was a life saver, cpmpanies started receiving sales revenue in a stable currency that maintained value to rebuild their balance sheets. Companies like Lobels bakery retooled and bought new machinery during this period. The likes of Innscor and Seedco expanded all over Africa because they had the capital and forex to grow internationally.

It is a fallacy and disingenuous to claim that dollarization makes local products more expensive and uncompetitive. During the GNU era, bread which sold for USD1 for 2 loaves, was cheaper than bread produced in South Africa and Botswana; bread from Zimbabwe could have been exported to those countries. It was more competitive to produce bread in Zimbabwe.

During dollarization the highest average gross salaries paid to workers in Zimbabwe was around USD500. At prevailing exchange rates that’s about R9 000. According to the Quarterly Employment Survey by StatsSA, average gross salaries in South Africa were R26,032 in December 2022. Even under a dollarized environment, Zimbabwean costs of production, especially labour, will still be relatively very low in comparison to our main trading partner; South Africa and hence Zimbabwean companies will remain competitive.

The current recorded growth in exports of manufactured Zimbabwean products was born out of dollarization which allowed companies to retool and acquire new machinery to be competitive in the region. Zimbabwean companies grew their balance sheets in a stronger and stable currency and were able to expand to other countries. Dollarization will preserve the domestic capital base which was decimated by hyperinflation in 2008.

Dollarization is the only viable solution in the absence of the necessary reforms required on the reserve bank mandate and its independence. 

Conclusion

The only way a newly elected government in August 2023 can turn around the current deep level economic challenges the country is facing, and successfully bring about the long elusive macroeconomic stability, is by taking bold steps to reform the RBZ against all vested interests and the lure of arbitrage opportunities by the connected. Without the key central bank reforms, macroeconomic stability will remain elusive in Zimbabwe.

The country is crying out loud for an independent central bank with a clear mandate to protect the value of the currency and maintaining stable domestic prices to create a conducive environment for sustainable economic growth. The GNU period clearly gives testimony to how the economy grew tremendously with no hindrance from the RBZ. Zimbabwe belongs to the global family of nations and we must align ourselves to best international practices that have been proven to work in successful nations.

The days of the RBZ experimenting with the livelihoods of the people of Zimbabwe through unorthodox and untested economic policy experiments must become a thing of our painful past, from which we have learnt hard life lessons. Zimbabwe’s policy on the operational mandate of the central bank is the most outdated in the region and explains why Zimbabwe is the only country consistently battling hyperinflationary conditions and a highly unstable currency.

Martin Majaji is a member of the Institute of Chartered Accountants in England &Wales (ICAEW) and read for an MSc in Finance from the University of London.  He is a financial, treasury and economics practitioner based in Johannesburg.



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