Central Bank Independence: the pros and cons


Amar Ingrachen

"Maghreb émergent"

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© Hélène Aldeguer, 2018

This publication file is in the framework of the activities of the network of independant media on the Arab world. The regional cooperation is made by Al-Jumhuriya, Assafir Al Arabi, Mada Masr, Maghreb Emergent, Mashallah News, Nawaat, 7iber and Orient XXI.

Over the last few years, several North African countries have undertaken economic reforms, in order to harness their respective economies to “globalisation” on the one hand and to respond to the social aspirations and demands for progress of the region’s populations on the other. This “reformist” tendency was accelerated with the advent of the so-called “Arab Spring” which disrupted the social and political organisation of those countries and brought to the fore new players and new tendencies, especially those inspired by theories of globalisation. These are in line with the rhetoric, internationally hegemonic today, which stipulates that any and every reform must favour “global financial integration”. An objective which includes, among other things, the independence of Central Banks from the State. This idea is rejected by many governments and economists. Indeed, the free circulation of capital involves “a major withdrawal from governmental control over that vital public resource which is money with in particular the end of the notion of the Central Bank as a State Bank,” as Jean-Claude Werrebrouk, former professor of economic science at the University of Lille 2 and author of Banques Centrales: Indépendance ou Soumission? Editions Yves Michel, 2012.

Central Bank independence or dictatorship of the technocrats?

The Bank of Algeria won its independence in 1990 over the fierce opposition of certain political and economic circles. An independence which was quickly challenged by the then head of government Belaid Abdessalam and permanently overturned by President Bouteflika as soon as he was elected in 1999. In an interview he gave the Financial Times on 19 July of that same year, the Algerian President declared himself “sole immovable” meaning everyone would have to answer to him. The proof came in 2016 when, to finance the Treasury deficit, he decided to resort to the creation of money by amending the credit and money law and dismissing the Governor of the Bank of Algeria who refused to approve this decision. Since then, the subordination of the Central Bank to the wishes of the Government has become an inescapable reality.

In Morocco, the notion of Central Bank independence was first broached in 2006 before being finally enacted in 2017 with the passing of draft-law N¨° 40-17 on the statute of the Al-Maghrib Bank. Some experts, economists and left-wing politicians viewed it as a Trojan Horse designed to undermine the country’s financial sovereignty. “The notion of Central Bank independence is a crude intellectual fraud,” ranted Najib Akesbi, one of the most influential Moroccan economists. In his view “Central Bank independence is a way of preventing States from having their own monetary policies and limiting a government’s flexibility.” Indeed, a Central Bank could previously finance the State at zero-interest and with no actual repayment if need be. When the Central Bank becomes independent, a government has no choice but to raise taxes, which is not always an easy thing to do, or borrow on the finance market. In the eyes of certain politicians, such a situation is felt to be unbearable, that Central Bank independence is tantamount to a sell-out of national sovereignty. But this hostility towards Central Bank independence is not only expressed by politicians. Some economists believe that for monetary policies to be in the hands of the President or the Government is “a good thing” insofar as they have been elected and benefit from a democratic legitimacy that the technocrats who run Central Banks do not have. “Entrusting monetary policies solely to Central Banks and hence to technocrats that no one has elected, taking these decisions out of the hands of the politicians who have the legitimacy to make them is to strike a blow against democracy […] Roughly speaking, those who favour this fraud are telling us: vote how you like, we’ll do as we please!” is Najib Akesbi’s opinion.

Worse yet, he believes, the technocrats who run the Central Banks act most often in accordance with a logic of submission to the institutions of international finance. And in practice the liberal reforms that have been in force in several countries of the region for over forty years, Egypt, Morocco and Tunisia, have not produced very interesting results. “To successfully rebuild the economies of the region the process has to be made safe against that idea of Central Bank independence. It is a tool for domination in the hands of the advocates of liberalism who care only about their profits and the internal balance of the international finance system. That idea is a true danger for our country,” Akesbi concludes.

Consequently, the Central Banks of the region are in a rather uncomfortable position. The Tunisian economist Aram Belhadj has summed up the situation nicely. In his words “they are caught between a rock and a hard place, between government policies on the one hand (with the danger of being made hostage to monetary policies designed to attain political or even politicking objectives) and the actors of globalised finance on the other hand, especially the financial mega-groups (with the danger of becoming hostage to monetary policy instruments designed to simply further enrich the financial actors).”

New dependencies in the age of financialisation

For Najib Akesbi, the problem also stems from the fact that “neo-liberal policies, which subtend this idea of Central Bank independence, act to foreclose all macroeconomic policies.” As proof of this, he points to the inescapable contradiction between the absolute primacy given by the international financial institutions to the fight against inflation and the need for certain countries to prioritize, on the contrary, their economic development or their struggle against unemployment, for example. Are these apprehensions realistic? Aram Belhadj does indeed think that becoming hostage to monetary policies could be harmful for certain economies, especially in developing countries. In order to minimize this danger, he suggests that “the statutes of a Central Bank should include goals of growth and social progress” and that “the accountability of the issuing institution should be to the people via its representatives so that it could be called to account whenever these are unlikely to be achieved.” In the eyes of Belhadj it is not so much Central Bank independence which is the problem as the objectives of the Bank’s policies which may be contrary to the interests of the populations of these countries.

The Algerian economist and former Governor of the Bank of Algeria agrees with him! : “When the sole objective of an independent Central Bank is financialisation, the problem is not its independence but the goal assigned to it by the legislature.” According to Hadj Nacer, the aim of autonomy for a Central Bank should not be dictated by any particular ideological tendency but should result from an in-depth debate on the government’s missions and the positioning of a given country’s economy in the context of globalisation. But this economist has to admit that the present reforms in favour of making Central Banks more independent are primarily aimed at subordinating them “to the logic of financial internationalisation, the logic of financialisation” and “hence at cutting them off from the real economy and people’s everyday concerns”.

The proper use of independence

Yet Central Bank independence is not necessarily a bad idea. In Hadj Nacer’s opinion the goal should be to make the Central Bank strengthen the industrial fabric and increase national production and do this in such a way as to ensure job creation while keeping a low rate of inflation. This economist assures us that the objective of the team he headed in the nineties was to make “the Central Bank act as a lever for the economic development of Algeria” but also to “increase the country’s sovereignty”. In a period of great political instability, the independence of the Algerian Central Bank was aimed at maintaining a degree of economic stability and meant to send a message to foreign investors. Because, the former Governor of the Bank of Algeria tells us, “a Central Bank which is not independent must inevitably submit to injunctions linked to the political conjuncture and a political conjuncture is always a short term affair since the balance of power is continually changing.”

In Tunisia, Central Bank independence was established by law (N° 2016-35) on 25 April 2016. At the time it was aimed at protecting monetary policies from political interference due to the frequent government changes since the 2011 revolution, which disrupted the internal balance of power each time. Aram Belhadj deems independence “a necessity”. At the same time, be believes that in a period of crisis adjustments must be constantly made to avoid destabilising the system. Thus he draws a distinction between “the operational independence of the Central Bank” which “must be real” and “the independence of its choice of goals” which must “not be absolute, especially in times of crisis”. An independence of this type, if it exists, “must be accompanied by an ongoing dialogue between the Central Bank and the political authorities, in order to eliminate any inconsistencies between monetary policies on the one hand and budgetary and fiscal policies on the other”. In other words, for Central Bank independence to be put to good use a consensus must be reached as to the objectives assigned to it and there must be permanent consultation between its managerial staff and the Executive.

This is what Mauritania has achieved in the recent reform of the statute of the Central Bank enacted on 16 July 2018 by the country’s National Assembly. Indeed, besides strengthening the independence of the executive bodies of the Bank and precisely defining the modalities and conditions under which the Governor and the Lieutenant Governor are appointed and dismissed, the law also set up among other bodies, a new collegial organ, “The Prudential and Resolution Council for Financial Stability.” This new body is designed to provide a space for policy dialogue between the Central Bank and the Government, to determine orientations and avoid situations of tension. In other words, it serves to pave the way for agreements between the Central Bank technocrats and the Government. Moreover, according to Hadj Hacer, such an arrangement is not only desirable but imperative because “Central Bank independence is the result of an internal balance, a set of internal rules,” and only an entity of dialogue and coordination can ensure that balance permanently so that neither party is tempted to use its power abusively.

In the end, “Central Bank independence, even when it is laid down by law, is the result of a balance of power… and there is no such thing as absolute independence since the independence of an individual or an institution is inscribed within an internal and external environment, always characterised by a balance of power.”

Amar Ingrachen
Researcher in literature. He works on the concept of trauma in literature. He is also a journalist specialised on economy at Maghreb émergent. Beside, he is an editor.

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