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Why most central banks are failing

By Stewart Musarapasi

Is it because of corruption, greed or simple malpractice by governments, central bank executives or political influence, which usually favours the government of the day?

Arguably, central banks the world over is referred to in different names. In America, it is called the Federal Reserve; in China, the People’s Bank of China; in Botswana, it is called the Bank of Botswana. South Africa and Zimbabwe refer to it with the same name – the Reserve Bank.

In Cameroon, it has a French name Banque des Etats de l’Afrique Centrale (BEAC) and it serves six countries of the Economic and Monetary Community of Central Africa CEMAC Zone. Cameroon enjoys the privilege of housing the bank’s headquarters, serving the national financial interests of five member countries.

One of the most tiresome intellectual debates the world over in the financial sector is on whether there is ever a Central Bank which enjoys full autonomy in this world. The central bank’s independence remains a bone of contention because central bank management and its committee are usually not given enough decision-making space by respective governments. Key decision-making by central bank executives is usually restricted to monetary policy and its implementation, but even then, the freedom is limited.

Notable functions of the central bank, for example, the South African Reserve Bank, include those of superintending the monetary policy, achieving price stability, maintaining sustainable economic growth and keeping the inflation rate low.

Questions arise however, on why most governments seem to hijack the functions of this mother of all banks. Could it be for self-centered gain by those individuals? Many a time, we read about concerted fights between the executive, specifically presidents, whose disposition to overall control of the bank has seen them fight for interest rates to be lowered, when practically, a central bank governor and the whole bank committee would have unanimously agreed to raise the rates. The overbearing executive powers have also been extended to trying to fix the exchange rates of their national currency as per their own interests.

Here is a picture on the debacle of interest rates: where there are prominent signs of rise in the rate of inflation, the most appropriate solution would be to increase interest rates, something economists term qualitative easing or in short, contractionary measure, which also benefits investors, who will be lured to pour in their resources in return of getting higher returns on their investment.

The interest rates issue is one of the main triggers of sensitivity, as most governments, especially those facing elections, would ride on it to set aside the independence of the central bank and give directives for interest rates to either be kept constant or be lowered, a move which is more populist and political than economical, and aimed at pleasing the general public, yet attracting a negative impact, as it causes capital mobility on the investors’ side, they will take away much of their investment and look elsewhere they can get a reasonably higher investment return.

In a certain Eastern European country, the government had to fight to try and force the central bank to lower interest rates, while the governor and the central bank committee had unanimously resolved to increase the rates and keep investors. Reason? The country will be having elections sometime this year. On the back of this populist bickering against economic sense, the functions of the central bank have been compromised, resulting in a weaker currency which might see investors take flight.

In a nutshell, the credibility of each and every bank in the world is key, but it can only be achieved on the back of the freedom of its mother bank to operate independently from populist politics. Such independence is not usually achieved in its totality, as the Central committee or the management, either reports to parliament or the executive, taking instructions where deemed necessary.

Ousted Gambian President Yahya Jammeh, upon leaving that country, allegedly instructed the Central Bank to release millions of hard currency, which he was latter accused of having swindled out of the national coffers.

Politics, populism, corruption, cronyism, power hunger and economic illiteracy by the executive can largely be the reason behind many a central bank’s lack of autonomy – and the executive’s choice to have majority interests sacrificed on the altar of political expediency.

Stewart Musarapasi is a Business and Political Analyst based in Europe. He can be contacted via:Email: Twitter:@stewart_msp

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