Why bother about regional harmonisation of legal and operational frameworks of central banks?

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SADC Member States acknowledge in Annex 2 of the SADC Protocol on Finance and Investment (FIP) that macro-economic stability is a precondition for sustainable economic growth. They have therefore agreed to pursue stability-oriented economic policies and agreed on specific macro-economic convergence criteria in the Regional Indicative Strategic Development Plan (RISDP).

Central banks play an important role in achieving some of these targets and consequently a chapter is included in the SADC FIP focusing on the harmonisation of legal and operational frameworks of central banks (Annex 5). This is a good example for the links between the various annexes to the FIP and also for the link of the FIP to other SADC documents such as the RISDP. Since annexes are interconnected, it is important that national and regional subcommittees responsible for a specific annex do not work in isolation, but cooperate closely in order to achieve the overarching objectives of FIP.

The best way to achieve harmonisation of legal and operational frameworks is to design a template or model law that Member States can use to adapt their own legislation and operational guidelines to regional standards and international best practices. The SADC Secretariat was therefore tasked with developing the SADC Central Bank Model Law, while Member States are encouraged to adopt the model law. Since the model law is based on international best practice, the harmonisation of rules and regulations in the region will reassure investors of a sound financial system and increase the attractiveness of the region for investors.

Member States have agreed to adopt price stability as the primary mandate of the central bank in order to ensure that inflation rates are kept within the range of 3 to 7 per cent. Furthermore, central banks are discouraged from lending to government in order to maintain a low and sustainable budget deficit and total public debts. To ensure that governments do not use central banks as money-printing institutions to finance budget deficits, Annex 5 promotes the autonomy and operational independence of central banks. Crucial elements of the autonomy include their responsibility for formulating and implementing monetary policy and the approval of the central bank’s budget by their own board, since the approval of budgets or the provision of funding by the government could comprise the independence of central banks.

Furthermore, Annex 5 stipulates that the Governor and Deputy Governors should be appointed by the Head of State or Government rather than by the line ministry. In order to ensure accountability and transparency the annex proposes that central banks establish a Monetary Policy Committee and publish the membership as well as the structure and functions. This is an important commitment since monetary policy decisions, in particular interest rate decisions, have a profound impact on the economy at large and on each and every household in particular.

Five of the commitments that Member States entered into under Annex 5 are used in the annual Monitoring and Evaluation Matrix that was designed to track the progress with the FIP implementation. Namibia has achieved four of these five indicators. The Bank of Namibia enjoys operational autonomy, sets its own budget, pursues price stability and does not lend to government since the government borrows on the domestic and to some extent foreign markets through the issuance of Treasury Bills and Bonds. Besides pursuing price stability, Bank of Namibia’s monetary policy stance is informed by the level of foreign exchange reserves required to maintain the one-to-one peg with the South African rand. The fifth indicator is partially achieved, namely compliance with the SADC Central Bank Model Law. Bank of Namibia is currently reviewing the Bank of Namibia Act in order to align it to international best practices and the SADC Model Law. Some of the provisions of the SADC Model Law required amendments to Article 128 of the Namibian Constitution that defines the role of the Central Bank. The changes effected in 2014 included clarification of the central bank’s authority.

Originally, the Constitution referred to the central bank’s control of finance institutions, but this was rephrased to controlling banking institutions and other financial institutions only if Parliament decides accordingly. The amendment was necessitated by the establishment of Namfisa as the supervisory authority for non-banking financial institutions. The amendments also make provision for the appointment of more than one Deputy Governor.

• Festus Nghifenwa is the SADC FIP Implementation Coordinator at the Ministry of Finance (info.sadc-fip@gov.mof.na). This article is the sixth in a series of 12 articles on the SADC Finance and Investment Protocol.