PUBLICATION OF THE SIXTH ISSUE OF A POLICY BRIEF ENTITLED "INDEPENDENCE OF CENTRAL BANKS"

by **claud39** Thu Sep 26, 2019 9:33 am

2019-09-26

The independence of central banks helps to achieve price stability, promote transparency and accountability

Legal independence represents the legislative provisions that reinforce the authority of the Central Bank, while actual independence reflects the ability of the Bank to adopt an independent monetary policy on the ground.

Political autonomy restricts government intervention in central bank decisions, while economic autonomy limits governments' ability to access funding from central banks

Many Arab countries have tended to enact legislative controls in support of the independence of central banks and Arab monetary institutions, and impose controls on the financing of governments in accordance with international best practices.

As part of its efforts to develop its research activities, the Arab Monetary Fund (AMF) launched a new periodical research series entitled 'Policy Brief', aimed at supporting decision-making in Arab countries by providing concise research publications that address key priorities and topics of interest to member countries with recommendations to policy makers. In this context, the Fund issued the sixth issue of this series entitled "Independence of Central Banks".

The Policy Brief noted that from the various definitions of the independence of central banks, a number of elements of the concept of “independence of central banks” could be identified, including the independence of central banks in the formulation and decision-making of monetary policy (objectives and instruments) in a coherent framework. Away from any political pressure.

Individuals in the formulation of monetary policy in central banks enjoy full autonomy and powers to make their decisions and are appointed or dismissed in accordance with the laws governing the operation of central banks (personal autonomy). In this context, it is also possible to distinguish between "political independence" of central banks and "economic independence".

Political independence, according to a number of economic literature, means that the appointment and dismissal of the Governor of the Central Bank and members of its Board of Directors is not within the powers of the Prime Minister, and that the Prime Minister is not a member of the Board of Directors. In the Bank's decisions, the economic autonomy of central banks restricts the ability of governments to obtain financing from the Central Bank and depends on specific controls in terms of value, terms and conditions of financing, so that funding is limited to emergency and temporary conditions and short-term. An agreement between the Central Bank and the Government to finance the market interest rate.

In this context, the distinction between De Facto , which is the governing framework for the autonomy of central banks, as stipulated in the laws governing the operation of central banks, and between de-Jure, according to the practical reality and powers exercised by the Bank, is also important. Effectively in determining, drawing and using the monetary policy tools to reflect the independence of the central bank from the government and the extent to which the bank adopts an independent monetary policy, so that what is mentioned in the law of the bank with its independence on the ground. If actual independence is achieved, it also leads to economic, financial and operational autonomy.

On the other hand, the dependence of the central bank arises when countries suffer from large deficits in the public budget, and the financial authorities find no way to finance this deficit after exhausting all other alternative means such as borrowing from abroad, and the lack of real resources to help fill the deficit. In this case, the government authorities, represented by the Ministry of Finance or the Treasury, resort to the resources of the Central Bank as the only entity authorized to issue money and thus ensure a resource that contributes to cover part of the fiscal deficit or what is known as "deficit financing."

The independence of central banks does not imply the lack of coordination between monetary and fiscal policies within an integrated institutional framework that ensures the effectiveness of each of these policies while ensuring the central bank to manage monetary policy without political interventions that limit its main role.

To measure the independence or subordination of the Central Bank, the indicators governing its relationship with the financial authorities, including the amount of temporary funding granted to the financial authorities, can be viewed as a percentage of government revenues, and the time it takes to retrieve the amount to the central bank's treasury. Indicators such as budget deficit to GDP and the size of public debt to GDP can also give an indication of the possibility of financial dominance over central bank decisions and authorities. In this context, some of the economic literature suggests that high rates of inflation to excessive limits ( Hyperinflation ) is due mostly to financial dominance over the decisions of the central bank 's resources and is an indicator of low levels of the independence of central banks.

The policy brief referred to indicators used to measure the independence of central banks, including the Cukierman Index for Central Bank Independence.This is one of the most important indicators used to measure the legal and actual independence of central banks. The value of the index varies from zero (representing a full monetary dependency of the central bank of the government) to the correct one (full independence of the central bank) based on a number of sub-indices used to judge the independence of the bank, including, for example, the entity responsible for drawing Monetary policy:

The independence of the Central Bank rises to its highest level whenever the Bank has exclusive authority in the formulation of monetary policy, and whenever the central objective of the Central Bank to achieve price stability, and the Bank has the right to make the appropriate decision in the event of conflict with other economic objectives. The lack of government representation on the Board of Directors of the Central Bank and restrictions on the financing of the Government by the Central Bank are also factors that support the Bank's independence.

The summary explained that the importance of strengthening the independence of central banks is that they enable central banks well to achieve price stability, avoid conflicts of objectives to achieve, and overcome the financial dominance of the government on the operations of central banks. They also provide greater transparency and help hold central banks accountable for their success in achieving monetary policy objectives, all of which are factors promoting economic stability. Applied evidence also suggests that the independence of central banks is associated with lower rates of inflation and lower levels of GDP and inflation fluctuations that support stability and economic growth.

In this context, the summary referred to some international experiences, the most important of which is the experience of the Bundesbank, where independence is an important item in the constitution of the bank since its establishment in 1957, and is considered one of the most independent central banks in the world, where the Bank is granted wide powers in the formation of monetary policy .

The summary also pointed out that many Arab countries have sought to ensure the independence of central banks to enable them to achieve the objectives of monetary policy in a framework of transparency and accountability. In this context, several legislations related to central banks and Arab monetary institutions provide for ensuring the political independence of central banks and granting them all the powers that enable them to exercise their role in the management of monetary policy without any government interference and in the context of frameworks to ensure effective coordination between monetary and financial policies, especially in In light of the expansion of the roles assigned to central banks and Arab monetary institutions to include achieving stability and financial inclusion. It also reinforces the political independence of Arab central banks. The appointment of central bank governors in a number of Arab countries through presidential or royal decisions.

Also, in some Arab countries, no government official may hold the position of governor or his deputy or be a member of the board of directors of the bank. It also reinforces the political independence of Arab central banks. The appointment of central bank governors in a number of Arab countries through presidential or royal decisions. Also, in some Arab countries, no government official may hold the position of governor or his deputy or be a member of the board of directors of the bank. It also reinforces the political independence of Arab central banks. The appointment of central bank governors in a number of Arab countries through presidential or royal decisions. Also, in some Arab countries, no government official may hold the position of governor or his deputy or be a member of the board of directors of the bank.

In terms of economic independence, which means restricting the financial dominance of government authorities over the Central Bank and its decisions, there are a number of bases that govern the financing of central banks and Arab monetary institutions for deficits in public budgets and government institutions and the provision of guarantees in accordance with quantitative controls and periods and terms and conditions in accordance with best practices. Monetary policy.

In conclusion, the summary stressed that the central banks and Arab monetary institutions play very important roles at the economic level, especially with regard to their role in achieving price stability, which contributes to provide an economic environment conducive to economic growth and employment, which requires at the policy level the importance of seeking more support Legal and effective independence of Arab central banks in a framework that ensures effective coordination of macroeconomic policies. In addition to the importance of enhancing the transparency of central banks to enhance the reliability of these banks, and the need to continue to strengthen the governance of central banks in line with developments and developments and international best practices, which requires further strengthening the role of the boards of directors of these banks, and the committees emanating from them, especially with regard to audit committees, and risk management Compliance and thus enable the governing bodies to fulfill their roles efficiently and effectively.

The full version of the report is available at:

https://www.amf.org.ae/content/Central_banks_Independence

https://www.amf.org.ae/ar/content/Central_banks_Independence

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