RBZ’s MPC seeing off final days
GOVERNMENT has begun the process of allowing the Reserve Bank of Zimbabwe (RBZ) to discontinue its Monetary Policy Committee (MPC), which has effectively been dysfunctional due to the country’s inability to control money supply.
The MPC had been created against the background of scepticism by analysts, who predicted that it would be doomed because Zimbabwe no longer had a currency of its own and therefore had very little or no leverage to control interest rates.
A Finance Bill currently under discussion in the eighth session of Parliament which started last week is proposing to abolish the MPC and to allow the RBZ board to carry all its functions.
The main purpose of the MPC had been to set interest rates, which determine the cost of borrowing.
In setting the rate, the MPC makes a judgment on whether it would meet projected inflation targets.
The MPC is chaired by the RBZ governor, who also chairs the RBZ board. The board has a supervisory role but leaves technical matters to the MPC, whose team comprises of the two deputy governors and a number of external experts.
The RBZ governor has little sway on the MPC, whose decision on interest rates is meant to be independent. It was expected that the establishment of the MPC would allow for the pooling of knowledge in monetary policy decision-making.
The MPC was set up in February 2012, three years after the country ditched its domestic currency and switched to a multicurrency regime in 2009.
It had, however, been mooted way back in 2007, when the country still had its own currency. Then, the central bank argued that there was compelling need for an MPC to decide on key monetary policy issues as had become the norm in modern economies.
Zimbabwean law then did not provide for the establishment of an MPC, and did not state clearly who was responsible for monetary policy.
In proposals contained in the Finance Bill currently before Parliament, the role of the MPC would be taken over by the board of the RBZ, as well as other committees.
“The clause will amend the Reserve Bank of Zimbabwe Act by repealing the section establishing the Monetary Policy Committee of the Reserve Bank, whose functions will be taken over by the bank’s board and other committees,” the Bill said, referring to Clause 17 of the Finance Bill 2015.
“Section 29B (Monetary Policy Committee) of the Reserve Bank of Zimbabwe Act (Chapter 22:15 (No. 5 of 1999) is repealed,” said the Bill.
In countries that have their own currencies, MPCs hold regular meetings at which members discuss the economy before deciding on rates and quantitative easing, which is the introduction of new money into money supply by a central bank.
Zimbabwe’s central bank lost control over the country’s monetary system on dollarisation. The country is therefore now dependent largely on policy decisions made by the United States’ Federal Reserve, due to the dominance of the greenback in the multi-currency regime.
John Legat, a Harare-based director at Imara, told investors when the MPC was set up three years ago that although such an organ was the norm in most countries, these countries had their own national currencies which made the MPCs relevant.
“Zimbabwe does not have its own currency, but has in effect adopted the United States dollar. The US dollar is managed by the US Federal Reserve, which determines the monetary policy and hence interest rates. We are fascinated to know what Zimbabwe’s MPC might discuss at their meetings since they will have no control over interest rates or US monetary policy.”
He suggested then that Zimbabwe should focus on supply-side reforms that would make the economy more efficient and attractive to the private sector, both domestic and foreign.
“To do that, a different type of committee may be needed, rather than establish an MPC,” Legat said. “The government should establish a committee of technocrats to work on supply-side reforms to the economy so as to allow the private sector to flourish in a full market economy. Unfortunately, it will likely take time for the Zimbabwean authorities to cede micro and macro management.”
It would appear like government has taken note too late in terms of disbanding the MPC, but it remains to be seen if it will consider measures suggested by Legat in 2012
The MPC issue is one of several factors under discussion in the RBZ and government aimed at stabilising the country’s financial system.
Zimbabwean banks will soon be subjected to annual assessment by rating companies appointed by the RBZ, as part of proposed amendments to the banking laws.
The new policy will emphasise the need for good corporate governance in the banking system.
The central bank will be responsible for accrediting rating firms for annual assessments, but assessed firms will be billed for the service, according to the Amendment Bill.
The Bill says directors and management at banks and controlling companies will be prosecuted for abusing funds. firstname.lastname@example.org