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Friday, October 30, 2020

Country focus: The GambiaRe: the financial, economic and other ramifications of printing new currency and minting new coins part 8

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Momodou Camara (Acca)

The timing and introduction of the new banknotes and minting of coins-(if any) is bad and ill conceived. From our financial news terminal here at Money and Markets @ Standard Newspaper, we have been looking at the latest move by the Central Bank of The Gambia.

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More radical instruments
Some have envisaged the use of what Milton Friedman once called “helicopter money” whereby the central bank would make direct transfers to citizens in order to lift inflation up to the central bank’s intended target. Such policy option could be particularly effective at the zero lower bound.

Banking supervision and other activities
In some countries a central bank, through its subsidiaries, controls and monitors the banking sector. In other countries banking supervision is carried out by a government department such as the UK Treasury, or by an independent government agency, for example, UK’s Financial Conduct Authority. It examines the banks’ balance sheets and behaviour and policies toward consumers. Apart from refinancing, it also provides banks with services such as transfer of funds, bank notes and coins or foreign currency.

Thus it is often described as the “bank of banks”. Many countries will monitor and control the banking sector through several different agencies and for different purposes.

the Bank regulation in the United States for example is highly fragmented with 3 federal agencies, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or Office of the Comptroller of the Currency and numerous others on the state and the private level.

There is usually significant cooperation between the agencies. For example, money center banks, deposit-taking institutions, and other types of financial institutions may be subject to different (and occasionally overlapping) regulation.

Some types of banking regulation may be delegated to other levels of government, such as state or provincial governments. Any cartel of banks is particularly closely watched and controlled. Most countries control bank mergers and are wary of concentration in this industry due to the danger of groupthink and runaway lending bubbles based on a single point of failure, the credit culture of the few large banks.

Governments generally have some degree of influence over even “independent” central banks; the aim of independence is primarily to prevent short-term interference.

In 1951, the Deutsche Bundesbank became the first central bank to be given full independence, leading this form of central bank to be referred to as the “Bundesbank model”, as opposed, for instance, to the New Zealand model, which has a goal (i.e. inflation target) set by the government. Advocates of central bank independence argue that a central bank which is too susceptible to political direction or pressure may encourage economic cycles (“boom and bust”), as politicians may be tempted to boost economic activity in advance of an election, to the detriment of the long-term health of the economy and the country.

In this context, independence is usually defined as the central bank’s operational and management independence from the government.

Central bank independence is usually guaranteed by legislation and the institutional framework governing the bank’s relationship with elected officials, particularly the minister of finance.

Central bank legislation will enshrine specific procedures for selecting and appointing the head of the central bank.

Often the minister of finance will appoint the governor in consultation with the central bank’s board and its incumbent governor.

In addition, the legislation will specify banks governor’s term of appointment.

The most independent central banks enjoy a fixed non-renewable term for the governor in order to eliminate pressure on the governor to please the government in the hope of being re-appointed for a second term.

Generally, independent central banks enjoy both goal and instrument independence. In return to their independence, central bank are usually accountable at some level to government officials, either to the finance ministry or to parliament.

For example, the Board of Governors of the U.S. Federal Reserve are nominated by the President of the U.S. and confirmed by the Senate, publishes verbatim transcripts, and balance sheets are audited by the Government Accountability Office. In the 2000s there has been a trend towards increasing the independence of central banks as a way of improving long-term economic performance.

While a large volume of economic research has been done to define the relationship between central bank independence and economic performance, the results are ambiguous. The literature on central bank independence has defined a cumulative and complementary number of aspects:

Institutional independence
The independence of the central bank is enshrined in law and shields central bank from political interference. In general terms, institutional independence means that politicians should refrain to seek to influence monetary policy decisions, while symmetrically central banks should also avoid influencing government politics.

Goal independence
The central bank has the right to set its own policy goals, whether inflation targeting, control of the money supply, or maintaining a fixed exchange rate. While this type of independence is more common, many central banks prefer to announce their policy goals in partnership with the appropriate government departments. This increases the transparency of the policy setting process and thereby increases the credibility of the goals chosen by providing assurance that they will not be changed without notice. In addition, the setting of common goals by the central bank and the government helps to avoid situations where monetary and fiscal policy are in conflict; a policy combination that is clearly sub-optimal.

Functional & operational independence
The central bank has the independence to determine the best way of achieving its policy goals, including the types of instruments used and the timing of their use. To achieve its mandate, the central bank has the authority to run its own operations (appointing staff, setting budgets, and so on.) and to organise its internal structures without excessive involvement of the government. This is the most common form of central bank independence. The granting of independence to the Bank of England in 1997 was, in fact, the granting of operational independence; the inflation target continued to be announced in the Chancellor’s annual budget speech to Parliament.

Personal independence
The other forms of independence are not possible unless central bank heads have a high security of tenure. In practice, this means that governors should hold long mandates (at least longer than the electoral cycle) and a certain degree of legal immunity. One of the most common statistical indicators used in the literature as a proxy for central bank independence is the “turn-over-rate” of central bank governors. If a government is in the habit of appointing and replacing the governor frequently, it clearly has the capacity to micro-manage the central bank through its choice of governors.
Financial independence
Central banks have full autonomy on their budget, and some are even prohibited from financing governments. This is meant to remove incentives from politicians to influence central banks.

Legal independence
Some central banks have their own legal personality, which allows them to ratify international agreements without government’s approval (like the ECB) and to go in court. There is very strong consensus among economists that an independent central bank can run a more credible monetary policy, making market expectations more responsive to signals from the central bank. Both the Bank of England (1997) and the European Central Bank have been made independent and follow a set of published inflation targets so that markets know what to expect. Even the People’s Bank of China has been accorded great latitude, though in China the official role of the bank remains that of a national bank rather than a central bank, underlined by the official refusal to “unpeg” the yuan or to revalue it “under pressure”. The People’s Bank of China’s independence can thus be read more as independence from the US, which rules the financial markets, rather than from the Communist Party of China which rules the country. The fact that the Communist Party is not elected also relieves the pressure to please people, increasing its independence.
Stick with me and with The Standard for Part 9.


*** No significant changes since June in the indicates rates and they remain as quoted figures as per the 11th. June, 2019.


*** Market prices are as at 29th. July, 2019

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