Reserve Bank Amendment Bill

Reserve Bank Amendment Bill
17 November 2009

This Bill was agreed to in Cabinet and was gazetted on the 14th August. It could be introduced into Parliament at any time after the Houses resume on the 20th October. [Electronic version of Bill available on request – also copy of Reserve Bank of Zimbabwe Act showing the effect of the amendments proposed by the Bill.] The House of Assembly’s Portfolio Committee on Budget, Finance, Economic Planning and Investment Promotion has the duty to consider the Bill and to table a report before the House of Assembly when the Bill has its Second Reading [House of Assembly Standing Order 105]. This portfolio committee could well meet during these next two weeks before Parliament sits again. The committee clerk has said that it is hoped that there will be a public hearing, but this is not certain, so it would be advisable for stakeholders and interested members of the public to submit any representations they may have on the Bill to the portfolio committee now.

Outline of the Bill

According to the Bill’s explanatory memorandum, the Bill seeks to bring the powers of the Governor of the Reserve Bank under the control of the Bank’s Board, to clarify the Bank’s functions and to increase the Bank’s reserves. These objectives are to be achieved in the following ways:

A. The Bank’s powers and functions will be limited by:

divesting the Bank of the function of furthering the Government’s economic policies [clause 2];
restricting the Bank’s power to deal in gold and precious metals. It will be allowed to do so “only to the extent strictly necessary to comply with its international obligations” [clause 3] [but does the Bank — as opposed to the State — have any such obligations?];
preventing the Bank from opening credits and giving guarantees [clause 3] [this will be a considerable reduction in its powers];
preventing the Bank from borrowing foreign currency on its own behalf; it will be able to do so only on the State’s behalf and only to the extent that its reserves are not adversely affected [clause 3];
restricting the Bank’s power to lend money [clause 5]. In this regard:
it will be allowed to lend money to the State and parastatals only if:
the loan [presumably this is the total of all loans — the Bill is not clear] does not exceed 20 per cent of the State’s revenues in the previous financial year;
the loan is denominated in Zimbabwean currency [it is not clear how this applies in the present multi-currency situation];
the loan is repayable within, at most, two years;
in the case of a loan to a parastatal, the loan has been approved by the Minister of Finance and is either repayable within a year or converted into State-backed securities;
b. the Bank’s function of lender of last resort to banking institutions will be limited to three-month loans given with the approval of the Minister of Finance to support banks’ daily lending business [It is not clear if these limitations will override the Bank’s lending powers under the Banking Act – this Act available on request];

c. the Bank’s power to lend money to its employees will be limited to loans that are commensurate with those given by commercial banks to their employees;

6. divesting the Bank’s Board of power to determine Zimbabwe’s monetary policy, to ensure price stability and to fix interest rates; those powers will be transferred to a Monetary Policy Committee consisting of the Governor and his deputies, and other members appointed by the President after consultation with the Minister of Finance [clause 13];

7. requiring the Bank to maintain reserves to cover all its liabilities to the public in Zimbabwe; at present its reserves need cover only 40 per cent of its foreign liabilities [clause 17];

8. requiring the Bank to give the Minister quarterly statements showing the state of its reserves, and obliging the Minister to table the statements in the House of Assembly [clause 17];

9. divesting the Bank of all the subsidiary companies through which it carried out its “quasi-fiscal activities”. The only companies it will retain are the two that print currency notes and deal in gold. The Bank’s shares in all the other companies are to be transferred to the State, apparently without compensation [clause 19].

B. The Bank’s internal procedures will be improved

The Bank will be obliged to establish an audit committee [clause 13].

C. The powers of the Minister of Finance over the Bank and its officers will be enhanced by:

obliging the Bank to follow the Minister’s instructions when representing Zimbabwe’s interests at foreign meetings and in international organisations [clause 2];
ensuring that any instructions given to the Bank by “the State” are conveyed to it through the Minister [clause 4] [so the President will not officially have independent access to the Bank and its Governor];
requiring the Board to consult the Minister before appointing an acting Governor if the Governor’s office falls vacant [clause 6] [currently the President appoints an acting Governor in such circumstances];
making the Minister’s permanent secretary a non-voting member of the Bank’s Board [clause 8];
obliging the Bank’s Board to send the Minister copies of minutes of all its meetings [clause 11];
setting up an oversight committee consisting of the Minister’s permanent secretary and all other Board members to conduct a twice-yearly review of the Bank’s performance [clause 13];
most importantly, empowering the Minister to give general policy directives to the Bank’s Board, which the Board will have to carry out “with all due expedition” [clause 18].
D. The Governor’s powers will be limited:

the Governor will no longer be able to appoint a deputy to act for him in his absence; this power will go to the Board [clause 6] — though, somewhat contradictorily, the President rather than the Board will appoint a deputy chairperson to chair its meetings in the Governor’s absence [clause 10];
the Governor’s wide power to delegate functions to officials in the Bank will have to be exercised subject to the Board’s directives [clause 7].
E. Board members to disclose assets

The Bill will oblige all members of the Bank’s Board to disclose their assets to the President within a month after the Bill becomes law [clause 19]. [Regrettably, there is no provision requiring the President to publish the lists of assets so disclosed.]

Merits and Demerits of the Bill

The Bill has been criticised in the Press on the grounds that it reduces the Bank’s independence and, while limiting the Governor’s powers, gives excessive powers of oversight to the Minister of Finance. In particular, the proposal to allow the Minister to give directives as to the policies the Bank must pursue is criticised as being contrary to international best practice, which requires central banks to be independent. And finally, the Governor of the Bank is reported to have protested at the State’s acquisition of the Bank’s shares in its subsidiary companies, on the ground that depositors’ money was used to acquire the shares and the acquisition amounts to an expropriation of that money. There is substance in some of these criticisms.

A. Independence of Bank

It seems to be generally accepted that central banks should be given a large measure of operational independence. The draft SADC Model Central Bank Law, for example, seeks to enshrine the principle that central banks in the region should “act independently and without fear, favour or prejudice or direction from any authority or institution”. Internationally, the more effective central banks are those with the greatest independence: the U.S. Federal Reserve, for example, and the European Central Bank. The powers that the Bill will give the Minister, in particular the power to give policy directives to the Bank, will make it impossible to say that the Bank is truly independent. It may be in practice, of course, because the Minister may choose not to control the Bank. But potentially he will be able to do so, which means the Bank will be subject to direction and control by the Government. And experience has shown that Ministers who are given powers tend to exercise them.

B. Bank’s functions

In clarifying and reducing the Bank’s functions, the Bill is sound. The scope for engaging in “quasi-fiscal activities” will be greatly reduced, and the Bank will be confined to its core functions: setting monetary policy and ensuring price stability. The Governor is reported to have welcomed the clarification, saying that it is noble for RBZ to focus on its core business.

C. Reserves

Similarly, the statutory controls which the Bill will impose on the reserves kept by the Bank can only benefit the country. The Bank will no longer be able to run down the reserves to nugatory levels. It should be remembered that they are not the Bank’s reserves: they are the country’s reserves and the country, represented by the Government, must have a say in how they are maintained.

D. Reduction of the Governor’s powers

The Governor’s powers will undoubtedly be reduced by the Bill. He will no longer be able to delegate powers to subordinates without the Board’s permission, and he, like the Board, will have to obey the Minister’s directives. This reduction in the Governor’s powers is no bad thing. While one may accept that the Bank itself should be independent, that is no reason for giving its chief executive officer overreaching powers within the Bank’s structure.

E. Corporate Governance

Some of the changes to the Bank’s corporate structure will be beneficial – that the Bank will be required to establish an audit committee is in line with international best practice; and the provisions that the Board should send its minutes to the Minister, to keep him or her abreast of what the Bank is doing, and that the Bank’s quarterly statements are presented to Parliament will increase transparency. On the other hand, the establishment of a committee to formulate the country’s monetary policy, to ensure price stability and to set interest rates, seems to leave the Board of the Bank with little to do. The committee’s three functions comprise the main functions of any central bank. If those functions are to be handed over to a committee, what role is the Board to perform? Similarly, the new oversight committee — which is really the Board chaired by the Minister’s permanent secretary — is unnecessary. Why should the Board have to reconvene itself into a committee, with a new chairperson, to consider reports from the Bank’s audit committee?

F. Seizure of shares

It is doubtful if the Government’s proposed expropriation of the Bank’s shares in subsidiary companies is constitutional. This clause may, therefore, attract an adverse report from the Parliamentary Legal Committee. It would have been better if the Bill had simply required the Bank to divest itself of the shares. [The clause’s unconstitutionality lies in the fact it makes no provision for compensation, or for notice to be given, or for an appeal to the Administrative Court, or for any of the other procedures required by section 16 of the Constitution. The proposed expropriation of shares would be permissible only if they were “held by a body corporate established directly by law for a public purpose in which no moneys have been invested other than moneys provided from public funds” [section 16(9)(b) of the Constitution]. The Bank is certainly a body corporate established directly by law for a public purpose, but according to the Governor it has been engaging in “retail banking”, accepting deposits from embassies, NGOs and parastatals, etc., and some of their money was used to purchase the shares. Whether the Bank was entitled to engage in such banking business is itself doubtful [the Reserve Bank of Zimbabwe Act does not seem to allow it] but presumably the Government expressly or tacitly permitted the Bank to do so. Hence it may be hard for the State to maintain that no money other than public money has been invested in the Bank, which it must do, if the acquisition of shares is to be brought within the provisions of section 16 of the Constitution.]

Conclusion

The Bill will undoubtedly improve the internal workings of the Reserve Bank. It will make the Bank more open and more accountable, and will restrict the Bank to its core functions. But it will also reduce the Bank’s independence. However, those who oppose the Bill on this ground have to face that independence can lead to the Bank and its officials becoming less accountable to the people, whom they are appointed to serve and that independence does not guarantee that the Bank will perform its functions competently. While the Bank was independent, its Governor and Board permitted Zimbabweans to suffer the highest level of hyper-inflation seen in modern times, and permitted the value of the Zimbabwean dollar to collapse to nothing. If Government oversight is the price we must pay for accountability and competence, it may be a price worth paying. The ideal would be to achieve a balance between independence and accountability

From the Ministry Of Finance Website: http://www.zimtreasury.org