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BoT autonomy is long overdue
2008-03-19 09:10:07
By Editor
Prof Benno Ndulu, only recently named Governor of the Bank of Tanzania, is by all indications determined to do a good job.
Rather unfortunately, though, he has taken up the powerful and delicate position at a time when a mega-scandal is threatening to rock the country’s central bank.
An independent audit report has seen a close link between the BoT management and the misappropriation of 133bn/- in one of the bank`s accounts, and the governor is rightly weighing the options of getting this crucial financial institution back on track.
Going by what most analysts have been saying, it appears that the scam took shape thanks to the peddling of political influence.
History has many examples of such interference having ruined central banks in many parts of the world, with disastrous economic consequences.
This is what may have made Prof Ndulu declare last week that his tenure would see BoT work as a truly independent institution, this being a condition without which central banks cannot function effectively enough.
The central bank’s task is to create the monetary and credit conditions a country needs to strike a balance between accommodating economic expansion and keeping inflation or deflation in check.
Doing that is set to help the bank improve the people`s welfare by ensuring sustainable, non-inflationary economic growth.
The need to see stable prices go hand in hand with achieving sustainable economic growth has led central banks around the world to adopt price stability as an integral part of their exclusive mandate.
Some countries, such as Mexico, have taken that view one step further by explicitly including price stability clauses in their national constitutions – the aim being to guarantee their central banks independence.
The idea that a nation`s money supply should not to be controlled directly by its government springs from the fact that doing the opposite would create a perverse incentive structure that would lead to economic disaster.
Zimbabwe is the most recent instance of this. A year or so ago, President Robert Mugabe declared inflation illegal and swore to arrest and punish anyone who raised prices or wages. It was a still-born threat.
Considering all this, we strongly encourage Prof Ndulu to soldier on because it is part of the key role of central banks to ensure that money supply does not get out of hand.
It is easier to allow inflation to finance ambitious social programmes or bail out the government from the burden of debt.
If not distracted by political motivation, the central bank can focus exclusively on piloting economic policy on a consistent course.
An independent central bank thus occupies a unique place in the community of government institutions. The law alone cannot guarantee that independence; things can work to plan only with enough political will and support.
Thus, the government should genuinely help BoT `cleanse` itself and have the ability to define its policy objectives without political pressure until it is really free to use its policy instruments without let or hindrance. Often, this is much easier said than done.
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