Learning Outcome 3: Central Banking

This learning outcome delves into the intricate and critically important world of central banking. We will be exploring the institution that stands at the very heart of a nation's monetary and financial system, acting as its operational and regulatory core. Our focus will be specifically on the multifaceted functions of the Reserve Bank of Zimbabwe (RBZ), aiming to provide a deep understanding of why its roles in regulation and supervision are vitally important for overall economic health and stability.

Furthermore, we will scrutinize the nature, content, and significance of its periodic monetary policy statements, which are key communication tools. Finally, this section will detail the various tools, instruments, and mechanisms that the RBZ employs to formulate, implement, and transmit its monetary policy decisions to the broader economy.

A nation's central bank is arguably one of its most critical economic institutions, wielding considerable influence over economic stability, the value of the currency, the availability of credit, the rate of inflation, employment levels, and ultimately, the economic well-being of its citizens.

1. Functions of the Reserve Bank of Zimbabwe (RBZ)

The Reserve Bank of Zimbabwe (RBZ), in common with central banks globally, performs a range of indispensable functions that are essential for the stability, integrity, and sustainable development of the Zimbabwean economy. These functions are typically mandated and clearly defined by national legislation, primarily the Reserve Bank of Zimbabwe Act, which outlines its powers, responsibilities, and objectives. These functions have evolved over time to meet the changing needs of modern economies, moving from basic roles like currency issuance to more complex responsibilities like macroeconomic management and financial stability.

a) Issuer of National Currency

The RBZ holds the sole and exclusive legal authority to issue legal tender currency (banknotes and coins) in Zimbabwe. This is a foundational and historically significant function of any central bank, often referred to as the "right of note issue." This monopoly on currency issuance is critical for several reasons: it allows the central bank to control the monetary base, it ensures uniformity and integrity of the currency in circulation, and it provides a source of revenue to the state (seigniorage). This function encompasses the entire lifecycle management of the national currency:

• Design and Denominations: The RBZ is responsible for determining the aesthetic design, appropriate denominations, and sophisticated security features of new banknotes and coins.
• Printing and Minting: The RBZ arranges for the secure and high-quality printing of banknotes and minting of coins, often through specialized domestic or international security printing companies.
• Distribution and Circulation Management: The RBZ ensures the efficient, secure, and equitable distribution of new currency notes and coins throughout the country to meet public demand, typically via commercial banks.
• Quality Management and Withdrawal of Unfit Currency: The RBZ is responsible for continuously managing the quality of currency in circulation, withdrawing worn-out, damaged, or old-series notes and coins.

b) Banker, Advisor, and Agent to the Government

The RBZ acts as the primary and principal banker for the Zimbabwean government:

• Banker to the Government: It maintains the government's principal bank accounts, processes government receipts and payments, and may provide short-term advances to the government within strict legal limits.
• Management of Public Debt (Domestic): The RBZ typically acts as the government's agent in issuing government securities (Treasury Bills, Treasury Bonds), servicing this debt, maintaining debt registers, and developing the market for government securities.
• Financial Advisor to the Government: The RBZ provides expert advice to the government on monetary, financial, banking, and broader economic policy matters.
• Agent for the Government in Specific Financial Matters: The RBZ may act as the government's agent in dealings with international financial institutions (IFIs) like the IMF and World Bank.

c) Banker to Commercial Banks (Often termed the "Bankers' Bank" or "Bank of Banks")

The RBZ serves as the bank for commercial banks and other eligible financial institutions:

• Holding Commercial Bank Reserves and Settlement Accounts: Commercial banks maintain accounts at the RBZ for statutory reserves, clearing balances for interbank settlements, and accessing central bank credit.
• Facilitating Interbank Clearing and Settlement Systems: The RBZ usually operates or oversees national payment, clearing, and settlement systems, including Real-Time Gross Settlement (RTGS) systems like ZETSS.
• Providing Liquidity to the Banking System: The RBZ can provide short-term liquidity to the banking system through monetary policy operations.

d) Lender of Last Resort (LOLR)

In situations of exceptional financial stress, the RBZ can act as a lender of last resort to fundamentally solvent financial institutions facing temporary liquidity shortages. This is to prevent illiquidity from causing insolvency or systemic instability.

• Provision of Emergency Liquidity Assistance (ELA): Short-term emergency credit, typically to solvent institutions, against good collateral, and often at a penalty interest rate.
• Preventing Bank Panics and Systemic Crises: Aims to maintain overall confidence in the banking system.
• Conditions and Discretion: Access is usually at the central bank's discretion and may come with stringent conditions.

e) Formulation and Implementation of Monetary Policy

The RBZ is responsible for formulating, announcing, and implementing monetary policy for Zimbabwe to achieve specific macroeconomic objectives.

• Primary Objective: Typically to achieve and maintain price stability (low, stable, and predictable inflation).
• Other Objectives: May include supporting sustainable economic growth, high employment, moderate long-term interest rates, and financial system stability.
• Monetary Policy Framework and Strategy: Involves setting clear objectives, choosing an operational framework, conducting economic analysis and forecasting, and having a structured decision-making process (often via a Monetary Policy Committee - MPC).
• Instruments of Monetary Policy: The RBZ uses various instruments (detailed in section 4 of LO3) to influence money supply, credit cost, interest rates, and sometimes the exchange rate.

f) Regulation and Supervision of the Financial System (Financial Sector Oversight)

The RBZ regulates and supervises banks and other specified financial institutions to ensure the soundness, stability, integrity, and safety of the financial system.

• Licensing and Authorization: Granting licenses for financial institutions to operate, ensuring they meet minimum prudential criteria.
• Setting Prudential Guidelines: Establishing rules on capital adequacy, liquidity, credit risk, market risk, operational risk, corporate governance, and AML/CFT.
• Monitoring and Surveillance: Continuously monitoring institutions through off-site analysis of submitted data and on-site inspections.
• Enforcement and Corrective Action: Enforcing compliance and taking remedial actions in cases of non-compliance or financial distress, ranging from warnings to license revocation.

g) Management of Foreign Exchange Reserves

The RBZ holds, safeguards, and prudently manages Zimbabwe's official foreign exchange reserves (foreign currencies, gold, SDRs, IMF reserve position).

• Facilitating International Trade and Payments: Used to finance essential imports and meet external payment obligations.
• Intervention in the Foreign Exchange Market: To stabilize the exchange rate, manage its level, or supply liquidity.
• Providing a Buffer Against External Shocks: Acts as a cushion against adverse events like drops in export earnings or capital flight.
• Maintaining International Confidence and Creditworthiness: Adequate reserves enhance confidence and access to international credit.
• Supporting Monetary Policy and Overall Economic Stability.

Management objectives are typically Safety, Liquidity, and Return (S-L-R), in that order of priority.

h) Promotion of Financial Stability (Macroprudential Oversight)

The RBZ has a systemic responsibility for the overall stability and resilience of the entire financial system, focusing on mitigating systemic risks.

• Identifying and Monitoring Systemic Risks: Assessing risks that could affect the financial system as a whole (e.g., failure of SIFIs, asset bubbles, excessive credit growth).
• Developing and Implementing Macroprudential Policies and Tools: Using tools like countercyclical capital buffers, sectoral capital requirements, LTV/DTI limits, and leverage ratios.
• Contributing to Crisis Management and Resolution Frameworks: Developing plans for managing financial crises and resolving failing institutions.

This often requires close collaboration with other regulatory authorities and the Ministry of Finance.

i) Overseeing and Promoting Safe, Efficient, and Innovative Payment and Settlement Systems

The RBZ plays a pivotal role in ensuring the country's payment, clearing, and settlement systems (Financial Market Infrastructures - FMIs) are safe, efficient, and innovative.

• Operating Key Payment System Infrastructure: Often owns and operates RTGS systems (like ZETSS) and may oversee ACHs.
• Setting Standards, Policies, and Regulations: Establishing rules for all payment systems to ensure safety, efficiency, resilience, interoperability, and consumer protection.
• Promoting Innovation and Modernization: Encouraging development in digital payments, mobile payments, and fintech solutions.
• Acting as a Catalyst and Coordinator: Bringing stakeholders together to develop national payments strategy.
• Crisis Management and Business Continuity for Payment Systems: Ensuring continued functioning of essential payment systems during crises.