THE Reserve Bank of Zimbabwe (RBZ)’s decision to reconstitute the Joint Liquidity Management Committee (LMC) has exposed policymakers to potential political interference, which could undermine crucial decisions, such as inflation targeting, according to the London-based Centre for Economic Justice (CEJ).
The LMC, composed of officials from the Ministry of Finance and the central bank, meets weekly to make critical decisions regarding the country's liquidity situation, as stated by the RBZ. However, concerns have been raised about the committee's structure and its implications for the central bank's independence.
In an interview with the Zimbabwe Independent following the release of the central bank’s 2024 mid-term monetary policy statement (MPS), CEJ official Chenayimoyo Mutambasere urged the government to focus solely on fiscal policy, leaving monetary policy decisions to an autonomous central bank.
RBZ governor John Mushayavanhu defended the move, stating that re-establishing the LMC was a key step in enabling authorities to implement necessary interventions to address a crisis that has destabilised markets for an extended period.
The LMC’s revival was one of several measures introduced in Mushayavanhu’s second MPS since he joined central bank in April.
“The liquidity management committee, comprising the Ministry of Finance, Economic Development and Investment Promotion, and the Reserve Bank was reconstituted,” Mushayavanhu said.
“The committee, tasked with effectively managing liquidity in the economy, meets every week to determine the necessary level of intervention. The LMC has so far assisted in enhancing the stability of the ZiG.”
Zimbabwe’s new currency, the ZiG, was introduced in April, replacing bond notes that had been battered by multiple economic challenges in 2023, prompting authorities to act to prevent further market turmoil.
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The independence of the central bank has been a contentious issue, with concerns that the LMC’s composition could compromise the RBZ’s autonomy.
Mutambasere said the joint committee undermined previous calls for the central bank’s independence from government ministries, particularly in financial matters.
Experts argue that an independent central bank should have the autonomy to carry out monetary policy interventions without interference from the government or politicians.
In many developing countries, however, state entities like national legislatures have sometimes influenced central banks’ goals, particularly those related to employment and price stability, which can affect electoral outcomes.
The ability of central banks to operate without political interference is seen as crucial for controlling inflation.
Almost all advanced economies and many developing markets have moved to ensure that central banks can decide monetary policy independently, free from political influence or the threat of reprisals.
In a paper titled ‘The Importance of Central Bank Independence’, the United States’ White House said in May: “A central bank’s credibility is bolstered by its independence and such credibility is also key to maintaining long-term, anchored expectations”.
“When credibility is undermined by political influence, people, firms, and others who set prices are less likely to believe the central bank’s commitment to lower inflation, which in turn can induce higher inflation,” the White House further stated.
Former US Federal Reserve chairperson Ben Bernanke was also quoted in the paper calling for central banks’ autonomy.
“A central bank subject to short-term political influences would likely not be credible when it promised low inflation, as the public would recognise the risk that monetary policy-makers could be pressured to pursue short-run expansionary policies that would be inconsistent with long-run price stability,” the top banker was quoted in the White House’s paper as saying.
Mutambasere also expressed concerns about the transparency of the RBZ’s lender of last resort facility, which was revealed in the MPS to have been utilised by some banks facing short-term liquidity challenges.
“Public interest requires transparency about which banks accessed these facilities and the terms provided,” Mutambasere said.
“In the past, the RBZ’s assumption of private debt from banks has contributed to debt overhang and diverted resources from key priorities.
“It is alarming that US$190 million has been traded through the interbank exchange at a discounted rate, effectively taxing the public purse an expense Zimbabwe cannot afford.
“The interbank rate should be determined by market forces through price discovery, not pegged. The export retention policy is a form of taxing businesses, infringing on property rights, and contributes to the trust deficit.
“The central bank should not rely on this mechanism to manage supply-demand mismatches, as it reduces flexibility in downturns when retention amounts decrease. And increases exposure risk on the economy,” she said.
