'BoN independent to avoid systemic risk'

PHILLEPUS UUSIKU



According to the new Bank of Namibia Act, 2020 (Act No. 1 of 2020), the bank is independent and act without improper or undue influence and without fear, favour, prejudice or direction from any person or authority.

Hence, a person or an authority may not seek to influence a member of the board, a member of a committee established under this Act or a staff member in the exercise or performance of powers or functions under this Act.

The governor of the Bank of Namibia (BoN), Johannes !Gawaxab, held a question and answer (Q&A) session last week to address issues raised by different stakeholders in the industry as it relates to the central bank.

Asked if there are any negative effects of central bank independence, !Gawaxab notes that at this point in time, he is an advocate of central bank independence.

“If you hire and fire central bank governors, staff and board members, you are introducing systemic risk,” he said. Hence, it is important to make sure central banks are independent as possible, he added.

!Gawaxab stressed on the core mandate of the bank which is monetary policy. “Monetary policy plays the biggest role in terms of improving the quality of lives of people by ensuring the protection of the currency, purchasing power of money and that inflation is well contained,” he said.



Research

Contacted for comment, Simonis Storms (SS) is also of the view that central bank independence is of critical importance to ensure that the bank effectively executes its functions.

“The idea of an independent central bank is to eliminate the collusion between government and a central bank. Therefore, with regards to independence we believe there are no negative effects,” SS said.

The Bank of Namibia is owned by the government and the governor is appointed by the president therefore, independence can be greatly questioned.

In developed countries, central bank independence leads to lower inflation, while in African countries, studies have not found any relationship between central bank independence and inflation.

So even with deemed central bank independence African countries have had the highest rates of inflation, where reducing inflation is still a top priority for many African countries, SS added.



Coordination

There should definitely be an element of coordination between government and the central bank. This is particularly important to define the long-term strategy of maintaining ­inflation and keeping unemployment down as far as possible. The goal of government should be to serve the public and focus on short-term ­strategies, the central bank should prepare the framework that needs to be ­nationally executed in order to obtain the most optimum level of inflation maintenance and ­unemployment rates in the long-term. Although the objectives of government and the central bank should be coordinated, it is still important for the central bank to be inde­pendent in order to implement the correct strategies that will benefit the nation in the long-term, SS pointed out.

Central banks in Africa have implemented far-reaching reforms to ensure greater effectiveness in monetary policy implementation, but they still face considerable challenges ranging from the challenge of linking inflation control and growth to the challenges of exogeneity of inflation drivers, shallowness of financial markets, and weak monetary policy transmission mechanism. While ensuring the preservation of the primary goal of price stability, central banks are now designing frameworks for supporting growth in a countercyclical framework and giving greater attention to financial stability and central bank independence, SS said.