Perils of tinkering with role of central banks
Delegates at an African Union (AU) – United Nations Economic Commission for Africa (Uneca) Conference of Ministers held in Addis Ababa in March, 2015, which included governors of African central banks, supported the widely held view that the role of central banks needs to be re-imagined to actualise Africa’s economic transformation and growth potential.
Yohannes Ayalew, Deputy Governor of the National Bank of Ethiopia was quoted by New African magazine (May 2015) as having said that “central banks should think outside their core mandate and begin to see themselves as key partners in development. Their challenge should include being capable of incorporating innovative ideas”. The first caucus for African central bank governors held in Abuja, Nigeria in 2014 recognised the critical role central banks play in the development of Africa and it was agreed then that future caucuses should develop a road map for implementing the Abuja recommendations.
There is a momentum around at the AU’s new approach to central banks. Linked to that, the AU will, in the near future, launch the African Central Bank (ACB), which will have a wider developmental scope. It’s becoming clear that the economic transformation and industrialisation that will create wealth and jobs and alleviate poverty in Africa cannot be realised unless key institutions like central banks are redefined and given a wider developmental mandate.
African central banks are expected to assume developmental roles in areas that are meant to drive Africa’s quest for sustainable development, industrialisation, growth and prosperity, and end poverty. This renewed drive on developmental central banking has brought with it a wide range of risks, potential conflicts and criticism.
Dr Florence Dafe and Professor Ulrich Volz, in their paper, Financing Global Development: The role of central banks, published by the German Development Institute in 2015, point out that balancing the central banks’ traditional functions of maintaining financial stability, on the one hand, and developmental roles on the other, could create potential conflicts.
They further argue that: “Where central banks are assigned a wider development mandate, they may face significant political pressure to pursue development policies at the expense of (financial) stability, particularly where central bank independence is limited, as in the case of many developing countries.”
In South Africa, for example, there is growing political pressure calling, not only for a widening of mandate for the South African Reserve Bank (SARB) but also, its nationalisation. The enabling legal framework for the SARB is the South African Reserve Bank Act of 1989. The primary mandate of the SARB is to protect the value of the currency in the interest of balanced and sustainable economic growth.
The SARB is privately owned and has about 650 shareholders including government. Globally, very few central banks are privately owned – most notably they are the central banks of Greece, Switzerland, Turkey, Belgium, Italy and the Federal Reserve Banks in the US.
South Africa’s President Cyril Ramaphosa, at the ANC’s 106th anniversary celebrations speech in January, remarked: “The ANC once more reaffirms the role, mandate and independence of the Reserve Bank. As mandated by the conference, we call on the government to develop proposals, in line with international practice, to ensure full public ownership of the Bank.”
Critics argue that the widening the SARB mandate will expose it to undue political pressure and potentially compromise its independence, envisaged under section 224 of the Constitution of South Africa.
Section 224 allows SARB – in pursuit of its primary objectives – to perform its functions independently and without fear, favour or prejudice, but there must be regular consultation between the Bank and the Cabinet Member responsible for finance.
Those who criticise an extended developmental mandate for the SARB on the basis that it will dilute its independence due to political interference, should realise that the absolute independence of central banks is more hypothetical than real.
Section 224 of the Constitution gives the SARB conditional independency. That independence can only be exercised within constitutional and statutory provisions outlined in the SARB Act. The autonomous status of central banks is measured through the banks’ ability to perform their statutory duties impartially, even if this could be in conflict or at the expense of other objectives that are more important to government and other political players.
External political pressure has often served as a litmus test for the independence of central banks. In July 2017, Bloomberg published an article, Zuma wrecking ball risks destroying country, in which they argued that: “His allies want to change the mandate of South Africa’s respected central bank to have it focus on the economic well-being of the citizens rather than stable prices. That manoeuvre is a precursor to subordinating the central bank to political control – and Zimbabwe shows where that can lead to.”
The Reserve Bank of Zimbabwe (RBZ) is a good case study and shows the economic consequences that can arise when a central bank has been captured by the executive arm of the state – the government and other political actors. The Zimbabwe debacle also shows the economic hazards that a country can encounter, if a central bank is given a plethora of developmental agendas, with no clear mandate to harness it from straying into everything and anything.
It further shows how dangerous it is to give too much power to a central bank, without policy and regulatory instruments to guide it, to ensure transparency and accountability. During 2004-2009 the RBZ was subject to immense political pressures and control, to the extent that it ended up acting as a quasi government structure.
During this period government expenditure – fuelled by RBZ’s money-printing spree – spiralled out of control. Government debt also ballooned to the current level of $10.8bn. Zimbabwe, in November 2008, suffered the second most severe episode of hyperinflation in recorded history, estimated at 79,600,000,000% per month. Zimbabwe was forced in February 2009 to abandon its own currency in favour of the US dollar.
The Zimbabwean experience galvanises calls for caution whenever the extension of developmental responsibilities to central banks is discussed, and rightly so.
Notwithstanding the above, as central banks are inevitably given developmental mandates in Africa, there is a need to make appropriate constitutional provisions and create new regulatory, policy and governance framework at country level.
This framework should clearly define the added developmental responsibilities to ensure transparency and accountability and that central banks act within given mandates to avoid potential conflicts of interest, and to ensure that they still retain independence from undue political interference to prevent their capture. The banks will need to maintain such standards while embarking on developmental roles that will inevitably involve close cooperation with the governments of the day.