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Is Central bank independence worth fighting for?

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Is Central bank independence worth fighting for?


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South Africa’s Finance Minister Tito Mboweni sparked a diplomatic incident by his vehement defence of the principle of central bank independence last weekend. Mboweni, himself a former governor of the South African Reserve Bank, fired off a volley of tweets at Zambian President Edgar Lungu for summarily firing Denny Kalyalya, governor of the Bank of Zambia.

‘Presidents in Africa must stop this nonsense of waking up in the morning and fire a Central Bank Governor! You cannot do that. This is not some fiefdoms of yours! Your personal property?! No!!’ said Mboweni, never one to mince his words. ‘The President of Zambia must give us the reasons why he dismissed The Governor or else hell is on his way. I will mobilize!’


Even after Zambia’s government angrily protested, Mboweni stood by his statement. ‘Central Bank independence is key. Not negotiable. Let all central bankers speak out!’ President Cyril Ramaphosa publicly reprimanded him for his undiplomatic attack on Lungu. Sadly it seems no other central bank governor did join Mboweni’s protest. Perhaps because the principle of central bank independence isn’t as universally cherished across Africa as he’d like.

The African Peer Review Mechanism (APRM), for example, doesn’t specifically demand it. It isn’t one of the explicit features it asks African governments to confirm in its long questionnaire on good economic governance.


APRM officials say it comes up indirectly among the long list of protocols and standards it recommends countries observe to help achieve its objectives. Dr McBride Nkhalamba of the APRM Secretariat told ISS Today that ‘central bank independence has never really been a conversation within the APRM country review process and this is simply because there is a principle in the AU Constitutive Act which emphasises sovereignty in the management of a country’s affairs.’

This leaves the prerogative of determining the independence of the central bank to each country according to its preferred economic ideology and policy. ‘And some countries have central command economies in which the central bank is a public institution with controlling equity held by the public.’ He adds, however, that this position isn’t universally considered commendable, so there’s a conversation under way in the African Union (AU) about whether there should be more central bank independence.

The secretariat’s Dr Misheck Mutize agrees that it isn’t singled out as a key underlying value of good governance in the AU and APRM’s founding statutory documents. However it’s implicitly assessed through associated macro-economic indicators such as inflation, exchange rate and monetary policy effectiveness.

Mutize doesn’t regard central bank independence as important to a country’s economic performance and success. ‘I see it as just an issue of separation of powers and maintaining checks and balances. It is no guarantee that a country’s monetary policy will be successful ... A country may maintain low inflation and [a] stable exchange rate at the expense of sustainable development, which is the main theme of the AU agenda. It is associated more with liberal policy approaches, which are not centred on promoting socio-economic development.’

This points to the ideological flavour of central bank independence, which is seen by many as a liberal (read ‘conservative’) prescription that tends to neglect growth. That’s certainly the way it’s viewed by the left in South Africa. Mboweni himself is engaged in a running battle with the ruling African National Congress (ANC) alliance partners COSATU and the SA Communist Party over this and other aspects of what they regard as his (neo-)liberal economic policy.

The principal task of central banks, of course, is to conduct a country’s monetary policy and the main objective of such policy – although this is perhaps after all a ‘liberal’ perspective – is to control inflation. Central banks mainly do that in two ways, through interest rates and by not recklessly printing money.

The results of having a central bank beholden not to prudent policy but to the ruling party were vividly illustrated in Zimbabwe in 2008. Inflation ran into billions of percent and the Zimbabwean dollar had to be printed in denominations of up to 100-trillion, to try to keep pace with its plummeting devaluation.

As Buks Wessels of the University of the Free State noted in a 2006 article in the South African Journal of Economics, ‘The importance of CBI rests on the premise that inflation is primarily a monetary phenomenon, and that the cost of reducing inflation can be lowered by an independent central bank with credibility. Support for CBI also stems from the argument that the power to create money should generally be separated from the power to spend it.’

It certainly seems Lungu fired Kalyalya because he felt he was holding too tight a rein on monetary policy, thereby failing to stimulate the economy and jeopardising Lungu’s chances of re-election next year. A Patriotic Front ruling party spokesperson went as far as publicly accusing Kalyalya of trying to wreck the economy in order to favour the opposition.

His remarks seemed rather to boomerang on himself, underscoring how important it is to insulate the central bank governor from such direct political pressures. Zambian commentators believe Kalyalya’s successor will do whatever Lungu asks him to do.

Academic studies are few, and not completely clear about the real impact of central bank independence on curbing inflation. Wessels found it had a beneficial effect on inflation. But a 2017 study of 48 African countries, reported in the Central Bank Review and cited by Mutize, was more ambivalent. It found that ‘unlike in developed countries, CBI is not sufficient in achieving lower inflation in Africa and the developing world.’

‘However, common to developed, developing and African countries, is that higher central bank independence is more effective in lowering inflation in the presence of high levels of banking sector development and institutional quality.’

The burden of that conclusion appears to be that African countries should go further than ensuring their central banks are independent. They also need to upgrade the quality, integrity and credibility of their overall banking and financial sectors, to derive a fuller benefit for their economies from that independence.

And so it seems a good idea to encourage that conversation that Nkhalamba says is already under way in the AU about moving central bank independence from the back burner to the front burner of APRM economic governance demands.

Written by Peter Fabricius, ISS Consultant


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