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Central bank’s independence, benefits to Zim

WITH the recent developments at the Reserve Bank of Zimbabwe (RBZ), it is now public knowledge that four directors were suspended from there on allegations of corruption. The worrying aspect is the source of the information leading to the expulsion of the directors.

guest column: David Mhlanga

Confidence and trust-building are key instruments any nation should strive to build in order to enable a sound business environment and to attract foreign direct investment. The conduct, actions and behaviour of the central bank is one of the major indicators of credibility for financial institutions in any country. Due to the importance placed on central banks the world over, this article will try to explain the benefits of the central bank’s independence to a nation.

In order for the economy to function properly, economists usually study elements of economics such as price indices, unemployment rates and gross domestic product. This will be important in elaborating national income, savings, consumption, investment, international trade, unemployment, output, international finance, and more importantly, inflation. Most of these functions are entrusted to the central bank, which in turn seeks autonomy so as to effectively work everything out.

The central bank is mandated with implementing monetary policies, checking interest rates, controlling the supply of money, being bank for the government as well as the lender of last resort, administering foreign exchange, gold reserves and the stock register, supervises and regulates the banking sector and establishes the interest rates so as to manage exchange rates and inflation. Without independence, these tasks will be manipulated to suit individual government or political needs, hence plunge the country into financial catastrophe.

It is argued by various researchers that a central bank’s independence is different and is based on each country’s policies. Some also argue that the more independent central banks are, the lower the levels of inflation. Central banks are also associated with such economic indicators as growth, stability in interest rates and unemployment, while they also generally uphold prices stability. For central banks to remain independent the following must be in place:

*A comprehensive legal and operational structure that outlines the monetary structure that should be followed; this should be devoid of any misconceptions or conflicts to ensure a smooth running.

*Transparency is also required from central banks. Continuous updates to governments and the public is necessary as that will be proof of accountability in all departments. The public will also be able to assess the progress. This also helps as the public will be able to gain confidence in the monetary policies.

*An effective institutional framework that ensures decisions on the monetary policy are made and implemented effectively and without any interference from political entities.

The central bank should and must be equipped with the power to make and implement decisions which include the following for it to be fully independent:

*Functional independence, which involves the right to make decisions on monetary policy and prices stability

*Personnel independence, which consists of the free selection of the board of trustees

*Instrumental independence, which involves the control of all elements of inflation such as preventing financing of government insufficiency

lFinally, financial independence that ensures the central bank has adequate finances for it to control its own full budget. Independence means the central bank is free from any political, legislative or Executive control. It also indicates that it is free from private or groups control in that it never serves the interests of few individuals, but rather the whole nation. It should, therefore, be free to undertake its mandate without external pressure that may stall economic progress and monitoring. When the central bank is independent, accountability is guaranteed in all its operations.

The most sensitive role of the central bank is of producing currency or money for a country. This emphasises the very fact that it should be autonomous and not be controlled by any elected persons, but by professionals with the interest of the country at heart. This will avoid any manipulation of the central bank operations for short-term political ambitions. Accountability is stressed in all its operations so that its administration of the monetary policy and price stability objective can be attained without prejudice.

When the power to create money is merged with the power to spend, there will exist a possible misuse and abuse of the role to create money. This can be seen where governments control the central bank and more money is printed during election periods in order to boost employment and spending in the short-term, but the nation falls into high inflation afterwards in the long term. With the separation of the power to spend and the power to create money, this is avoided. This means no political or selfish interest will be served. When the central bank is independent, it will base its policies on long-term gains and this helps in attaining future growth.

When the central bank is independent, no policy is compromised to suit political interests. The professionals operate on long-term projections and thus decisions on interest rates and money supply matters are made appropriately on the expectation that these will benefit society and not a clique or cartel. Central bank independence has been associated with low inflation rates and lower long-term budget deficits.

David Mhlanga is a doctoral fellow of economics at the North West University, South Africa. Email: dmhlanga67@gmail.com

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