Central banks are the most competent institutions for maintaining and sustaining their countries’ economic stability. Central banks in Africa, including Bank of Zambia are changing as the continent develops increasingly integrated with the global financial system It is imperative that central banks have legal independence besides their actual sense of the independence, but others may dispute stating that the central bank and government should coordinate their action for the purpose of achieving some specific priority macro-economic objective. Therefore, this assignment will critically discuss whether the Bank of Zambia is independent.
In Roland (2014)’s view, “a central bank, reserve bank, or monetary authority is the institution that manages the currency, money supply, and interest rates of a state or formal monetary union and oversees their commercial banking system”. The Bank of Zambia (BOZ or the Bank) is Zambia’s central bank and is charged with the responsibility of creating and implementing monetary policy to ensure the country’s macro-economic stability. Currently, the legal framework for Bank of Zambia operations, defined as the legislation that directly impacts on the Bank of Zambia, comprises the Bank of Zambia Act, No. 43 of 1996 and the Banking and Financial Services Act, Chapter 387 of the Laws of Zambia. The 1996 Act repealed and replaced the Bank of Zambia Act of 1985. This was to establish a modern legal framework that would respond to the needs of the times following the liberalization of the economy in 1991. (Chiumya 2004).
Governments generally have some degree of influence over even "independent" central banks; the aim of independence is primarily to prevent short-term interference. The Bank of Zambia (2015) report says, “it enjoys a high level of independence although provisions have been included in the draft constitution to address its autonomy”. Advocates of central bank independence argue that a central bank which is too susceptible to political direction or pressure may encourage economic cycles, 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 framework, independence is usually defined as the central bank's operational and management independence from the government. There are areas in which the influence of government is comprised or drastically condensed. These are as follows.
Firstly, the Bank of Zambia has anatomy of personnel independence. Personnel independence refers to the influence that government has a say in appointing members of the board of the Central Bank. If government appoints members with the intention of supporting government policies on the board, the bank will be less independent. This element assesses the nomination and dismissal of the Governor and members of BOZ’s decision-making bodies as pertains to the political authorities. In practice, it is not feasible to exclude government influence completely when appointments are made to such an important public institution as a central bank. Personnel independence therefore depends on the influence that government has in the appointment procedures. Various criteria are relevant here, such as government representation in the governing body of the central bank, appointment procedures, terms of office and procedures governing dismissal of the board of the bank. Section 10 of the Act vests the power of appointing the Governor in the President of the Republic of Zambia. This appointment is for a period not exceeding five years, and hence protects the Governor’s term of office. In terms of section 10 (2), this appointment however, is subject to ratification by the National Assembly. Further, section 13(1) (b) vests the power of appointing Members of the Bank’s Board in the Minister of Finance and National Planning. Finally, sections 10 (7) and 14(2) give the power to remove the Governor and members of the Board to the respective appointing authorities. Their terms in office is specified in sections 10(1) and 14(1), which gives the Governor five years and Directors three years, respectively. A key point is that the power to appoint and remove both the Governor and board continue to vest in the Executive.
Secondly the Bank of Zambia is financially independent. No central bank can operate in a credible and independent manner without proper financial means. politicians can easily influence the Bank’s policy directly or indirectly thus compromising not only its financial independence but also its legally mandated tasks. The financial independence of the central bank or its financial strength means the ability of the central bank to meet all its goals with its own resources, and independent decision-making on measures that will be applied and the instruments to be used for their implementation. As Mboweni (2000) states, “the power of spending money should somehow be separated from the power of making money’. Although the central banks have functional, institutional and personal independence, their overall independence will be jeopardized unless if they are not able to generate enough financial resources to exercise their functions. According to the Statute of the European System of Central Banks (ESCB), the Member States must not allow their central banks to bring themselves in the situation of not having enough financial resources to carry out their tasks related to the European System of Central Banks (ESCB) (Amtenbrink 2005), Yet, the government enjoys the ability to directly finance expenditure and deficits through Central Bank operations, the bank, and thus monetary policy, is seen as being influenced by fiscal policy and is therefore less independent. In this regard, four features necessary for financial independence include the right to determine its own budget; the application of central bank-specific accounting rules; clear provisions on the distribution of profits; and clearly defined financial liability for supervisory authorities. The Act contains several provisions regulating the way the Bank is to conduct its financial affairs and the government’s responsibility towards its financial well-being. In the first instance, section 6(3) makes it clear that the Government is the sole subscriber to the paid-up capital of the Bank and its holdings of the paid-up capital is not transferable in whole or in part nor can it be subject to any encumbrance whatsoever. Per section 6(5), whenever the BOZ Board certifies that the assets of the Bank are less than the sum of its capital and other liabilities, the Minister is required to cause to be transferred to the ownership of the Bank negotiable and interest bearing securities issued by the Government for such amount as is necessary for the purposes of preserving the capital of the Bank from any impairment. Though regulator of the banking system, BOZ then was also perceived by the government of the day, as an instrument of national investment policy. For instance, Bank of Zambia acquired an equity stake in the Development Bank of Zambia, initially wholly government owned vehicle for long term debt and equity finance and the Zambia National Commercial Bank, the only commercial bank wholly that was owned by the government.
Thirdly, the Bank of Zambia has policy independence. Policy independence is related to the room for maneuver given to the central bank in the formulation and execution of monetary policy. A central bank has goal independence if it can decide on the formulation of its ultimate objectives. In practice, most central bank laws formulate one or more objectives. For instance, Section 4 of the Bank of Zambia Act provides that the functions of the Bank shall be to formulate and implement monetary and supervisory policies that will ensure the maintenance of price and financial system stability to promote balanced macroeconomic development. However, Monetary policy is heavily influenced by the government’s view as to where they want interest rates to be in an environment of controlled pricing, and their priorities about rural lending and or other Small and Medium Enterprise (SME) activity. In this regard BOZ Deputy Governor Danny Kalyalya (1996) has stated: Prior to 1992 monetary policy had multiple objectives. Targets had also not been well defined, and the implementation of monetary policy relied mainly on direct instruments which included fixed interest rates and credit allocation, core liquid assets and statutory reserve requirements. Equally important, the financing of the Government fiscal budget relies heavily on central bank borrowing. As it turned out, real interest rates were for the most part negative which resulted in high levels of disintermediation, as economic agents shunned the banking system in preference for other forms of assets that could under the circumstances provide a hedge against loss of value. Moreover, often the monetary policy was loose, mainly as a way of providing relatively cheap credit to state owned enterprises, resulting in high growth rates in domestic credit and consequently in the money supply. (Cottarelli and Giannini, 1997) point out, “if the central bank has been trusted with various and possibly conflicting goals such as achieving low inflation and low unemployment, it has considerable scope in deciding its priorities”. In that case, the central bank has considerable goal independence since it is relatively free to set the final goals of monetary policy. It could for instance, decide that price stability is less important than output stability, and act accordingly.
- Quote paper
- Mukosha Mutenta (Author), 2019, Is the Bank of Zambia independent?, Munich, GRIN Verlag, https://www.grin.com/document/490360