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A how to book for restructuring the RBZ
The Zimbabwean
August 06, 2009

A new book entitled Restructuring and Reform of the Reserve Bank of Zimbabwe Towards Good Governance has been published by the Centre for Peace initiatives in Africa.

If history teaches us anything it is that governments cannot be trusted to manage money. When a currency is unredeemable or convertibly into other freely traded currencies, its value will then depend entirely on the judgments and the conscience of politicians. This was the situation before the inclusive government.

As the reader will note, this book points that the power of printing press and major sources of government finance for the last few years, have served as an engine for creating hyperinflation. This has caused the debasement of the national currency. As a result, national savings have been destroyed and it's necessary to restructure and reform the central bank operations.

In Zimbabwe, we saw these signs well before hyperinflation took hold. people preferred to keep their wealth in monetary assets or in non-monetary assets or in a relatively stable foreign currency. Amounts held were immediately invested to maintain purchasing power whilst interest rates, wages and prices were linked to a price index and the cumulative inflation rate, which typically exceeded 100 per cent.

This book points out that, for very political reasons, the government often tried to disguise the rate of inflation through a variety of methods. businesses were blamed for unscrupulousness and greed, when the cause was clearly excessive money creation. this tended to undermine trust in the Zimbabwean dollar, thus increasing inflation.

Price controls resulted in hoarding and in extremely high demand for controlled goods, causing shortages. in addition, the supply of goods and services diminished.

Bring back the Zim dollar

The effectiveness of the new arrangement is that RBZ cannot print US dollars. The RBZ has effectively surrendered the functions of a traditional central bank. The Reserve Bank can no longer create money as it wishes.

It can neither formulate nor execute monetary policy nor can it set interest rates.

More importantly, the Reserve Bank can no longer function as a leader and the survival of several financial institutions is in doubt. Zimbabwe's fiscal arrangements need to be changed in order to ensure discipline so that the budget-financing gap is gradually eliminated.

This book notes that requisite action must focus on moving all government funding, as well as the financing of parastatals, local government and municiplalities, from the RBZ to the Minister of Finance. The government must begin preparations for a continuous revision of revenue estimates and expenditure budget plans for the central government.

The book further urges reforms in Zimbabwe's monetary system by restructuring and re-introducing the Zimbabwean dollar. Under these arrangements, the RBZ would be able to set the monetary policy for the country based on a price level target set by the government and approved by Parliament.

Macro-economic policies

To be credible, Zimbabwe would have to pursue sound macro-economic policies while at the same time building its foreign exchange reserves. Restoration of a sound monetary system will require that the banking system be provided with adequate liquidity. All financial assets held by the financial system will have to replaced by alternative assets whose store of value is assured.

Zimbabwe must use the period between now and the re-launch of the Zimbabwean dollar effectively. it must reform and restructure the RBZ along the lines discussed in the book. The independence of the RBZ is central to the effectiveness of monetary policy in future.

Fearing policy reversals, some countries have taken the extra step of making sure that the governance provisions and mandates of the central banks are included in their national constitutions. This provides added credibility to central bank action, and avoids the accusation that central banks will always be subservient to the government that Zimbabwe adopts this practice, the book notes. Having gone through the recent episode of hyperinflation, it is hoped that the lesson has been learnt well, and that Zimbabwe now knows that money alone does not improve the social well being of Zimbabwean citizens unless it has somehow been earned. this book is a must read for all Zimbabweans, businessmen and economists.

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