Leonard Nkole Kalinde*



Central banking is of cardinal importance in any country because of the legal right normally granted to central banks to create money. This money can serve as a means of payment, a unit of account and a store of value. One of the important issues immediately arising after granting this right to a central bank, is whether this function should fall under the ultimate control of the executive branch of government – the cabinet and its administrative departments – or whether parliament should leave this responsibility to be freely executed by an independent, autonomous powerful institution run by unelected people.


The traditional argument in favour of a strong, independent central bank is that the power to spend money should in some way be separated from the power to create money. Numerous episodes in the world’s economic history testify to a government’s potential abuse of its power to create money. However, one potential objection to a completely independent central bank is lack of democratic accountability and transparency. This paper discusses the challenges of ensuring central bank accountability and transparency in an environment where the central Bank is independent. Part two discusses the concept of central bank independence. Part three examines and analyses the need to have democratic accountability and transparency in the operations of a central bank. Part four concludes that proper democratic accountability and transparency in central operations is not a counterweight to the principle of central bank independence.



Nowadays it is widely believed that a high level of central bank independence coupled with some explicit mandate for the bank to restrain inflation are important institutional devices to assure price stability. It is thought that an independent central bank can give full priority to low levels of inflation, whereas in countries with a more dependent central bank other considerations, notably, re-election perspectives of politicians and a low level of unemployment, may interfere with the objective of price stability. Indeed, there is considerable evidence for a negative relationship between central bank independence and inflation. The extent and nature of central bank independence can be assessed on the basis of its legal provisions However, central bank independence also hinges on a broad series of factors and customary practices, which are partly determined by historical developments in the different countries. In particular, the way in which certain conflicts with other bodies of government have been resolved influences the extent to which a central bank is effectively protected against external interferences and marks the boundaries of independence.   


Central Bank independence refers to three areas in which the influence of government must be excluded or drastically curtailed, that is to say, independence in personnel matters, financial autonomy and policy independence.  These are now discussed hereunder:



2.1. Personnel Independence

The nomination and dismissal of the Governor and members of the central bank’s decision-making bodies pertain 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 central banks. Personnel independence thus refers to the influence that government has in appointment procedures. Various criteria are relevant here, like governmental representation in the governing body of the central bank, appointment procedures, terms of office and procedures governing dismissal of the board of the bank.


The legal framework for central banking in Zambia, which is the Bank of Zambia Act No. 43 of 1996, in Section 10, vests the power of appointing the Governor in the President of the Republic of Zambia. However, this is subject to ratification by the National Assembly. Furthermore, Section 13(1)(b) vests the power of appointing Members of the Bank of Zambia Board of Directors in the Minister of Finance and National Planning. Finally, Sections 10(7) and (14(2) gives the power to disappoint the appointment of the Governor and Members of the Board of Directors to their respective appointing authorities. Their tenure of office is specified in sections 10(1) and 14(1), which gives the Governor five years and Directors three years, respectively.      


Financial Independence

A central bank cannot operate credibly in an independent way without proper financial means. It is clear that politicians can influence central bank policy if the government is able to finance its expenditure either directly and or indirectly via central bank credits. In that case there is no financial independence. The concept of financial independence should, thus, be assessed from the perspective of whether any third party is able to exercise either direct or indirect influence not only over the central bank tasks but also its ability to fulfil its mandate. In this regard, four aspects of financial independence – 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 – are particularly relevant in this respect.


The Bank of Zambia Act has several provisions that regulate how the Bank is to conduct its financial affairs and what the government responsibility is 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 transferrable in whole or in part nor can it be subject to any encumbrance whatsoever. According to Section 6(5), whenever the Bank of Zambia 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. In addition, Section 7 has elaborate provisions on how the net profits of the Bank are to be determined for each financial year, and where the Bank makes a loss on its profit and loss statement, as certified by the auditors, the Minister is again required to cause to be transferred to the ownership of the Bank, cash or negotiable instruments bearing market interest rates and such securities shall be delivered to the Bank within sixty (60) days from the date of certification of the accounts by the auditors.   


2.3. Policy Independence

Policy independence is related to the room for manoeuvre given to the central bank in the formulation and execution of monetary policy. It may be useful to distinguish between goal independence and instrument independence. A central bank has goal independence if it can decide on the formulation of its ultimate objective(s). In practice, most central bank laws formulate one or more objectives. For instance, Section 4 of the Bank of Zambia Act provide 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 so as to promote balanced macroeconomic development. However, if the central bank has been trusted with various (possibly conflicting) goals – such as achieving low inflation and low unemployment – it has considerable scope in deciding on 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 in
stance, decide that price stability is less important than output stability, and act accordingly. Finally a central bank must wield effective instruments in order to defend its objective(s). A bank that has instrument independence is free to choose the means by which it seeks to achieve its goals. Clearly, if government approval is required for the central bank’s use of policy instruments, no instrument independence exits. Perhaps, the most disconcerting provision of the Bank of Zambia Act is Section 5, which provides that the Minister may convey to the Governor such general or particular Government policies as may affect the conduct of the affairs of the Bank and the Bank shall implement or give effect to such policies. This provision could lead to serious interference with the operations of the Bank.      


At a glance, the concept of central bank independence seems to be in conflict with the democratic principle that government policies should be controlled by elected officials rather than by an elite group that is insulated from the political process. Although there are plenty of other areas of national life where decision-making is delegated to independent unelected officials, the judiciary being a prime example, there is a fundamental confusion here between being independent and lacking accountability and transparency. It is often argued that central bank independence and democratic accountability are contradictory. This is, however, only correct as far as decisions about the ultimate goal of and final responsibility for monetary policy are concerned. In other words, a central bank should not be goal independent but must be granted instrument independence.


The corollary of this view is that the institutional commitment to macroeconomic stability should come from the government in the form of an explicit, legislated mandate for the central bank to pursue, for instance, price stability as its overriding long-run goal. Indeed, as Issing argues, the more clearly and precisely this mandate is defined, the easier it will also be in a democracy to monitor the performance of the central bank. Moreover, in order to maintain credibility, an independent central bank must not only be open and clear about the reasons for its actions but it must also be accountable to democratic institutions.


3.1. Central Bank Accountability

In any evaluation of the democratic accountability of the central bank, the relationship between the central bank itself and the legislature has to play a major role. No central bank can be totally independent, in the sense that it is not answerable to anyone. Even the most independent central bank has to report in some form or another to the legislature, which in any case also has the ultimate power to change the laws governing the central bank. In this regard, it has been argued that the legislature holds the ultimate responsibility for monetary policy since it can change the legal basis of the central bank. The mere threat of a change of the law may induce even independent central banks to ensure that monetary policy will in general be in accordance with the wishes of elected politicians. However, there is a difference between a situation where policy decisions are under continuous scrutiny and an arrangement where the central bank reports to the legislature periodically.


In the Zambian context, Section 9 (1) of the Bank of Zambia Act requires the Bank, in consultation with the Minister, to publish in the Government Gazette, every six (6) months interval, a policy statement that shall contain: (a) a description and an explanation of the reasons for the monetary policies to be followed by the Bank during the following six (6) months; (b) a description of the principles that the Bank proposes to follow in the formulation and implementation of monetary policy during the next two years or such other period of time as the Minister may decide; and (c) a review and assessment of implementation, by the Bank, of monetary policy during the period to which the last proceeding six months policy statement relates. The Minister is required, within the first sitting of the National Assembly next after the receipt of the monetary policy report, to lay it before the House.


In addition, Section 27 requires the Board of the Bank of Zambia to, as soon as is practicable but not later than six months after the expiry of each financial year, submit to the Minister a report concerning its activities during such financial year. The Minister may also request the Board to submit to him such other reports, returns or statements, duly certified by an auditor, as he may consider necessary. Furthermore, the Bank of Zambia is also required, under Section 28(1), to cause to be published in the Government Gazette a return of its assets and liabilities, and to deliver to the Minister a return of its monthly assets and liabilities whenever he so requires. 


It is important to note that the issue of independence and accountability also turns on the nature of the relationship between the government and the legislature as the political authorities on the one hand and the central bank on the other. Without encroaching on the independence of the central bank, there should be a legal requirement for the central bank to report to the legislature and/or explain policy actions in the legislature. The legislature should have the opportunity to review the performance of the central bank with regard to monetary policy on a regular basis, while the central bank at the same time can explain and justify its conduct. In the European case, the Treaty establishing the European Community imposes precise reporting obligations on the European Central Bank. The European Central Bank must deliver an annual report on the activities of the European System of Central Banks to the European Parliament, the European Council and the European Commission. The European Parliament can also summon the President of the European Central Bank and the other members of the Executive Board to appear before it and make the necessary presentations.


Furthermore, a central bank may not only be directly accountable to the legislature but also to the government, which is, in turn, accountable to the legislature. In that case, it is important that the government is able to influence the central bank’s behaviour. Without such influence, accountability would not go beyond mere reporting by government to parliament of central bank policies, for which government cannot be held responsible. Finally, the dismissal procedure for a central banker can amount to a mechanism of ex post accountability if a central banker official can be dismissed on the grounds of bad performance, that is to say, not realising stated objectives. Dismissal may function as a sanction for poor performance by linking the tenure of central bank officials to policy results, that is to say, meeting the predetermined monetary policy target. This is the case for the Reserve Bank of New Zealand where the policy target agreement between the Governor of the Bank and the Minister of Finance lays down the policy targets, which the former has to achieve. Inadequate performance can result in the dismissal of the Governor.     


3.2. Central Bank Transparency

Another very important element of central bank accountability is central bank transparency. In this regard, central bank transparency cannot be logically separated from accountability. This is because whatever other arrangements concerning democratic accountability may exist, their scope is limited without transparency because information concerning the behaviour of the central bank is crucial for the evaluation its performance. Where the reasoning behind, and strength of opinion supporting, certain monetary policy decisions are transparent, it is easier to make a judgement and to hold central bank officials accountable for their behaviour. Indeed, as Buiter argues, the entire monetar
y policy process must be transparent for democratic accountability. Therefore, a central bank should be required to report at regular intervals on its current and future plans for monetary policy in accordance with the monetary objective. This is even more important where a clear monetary objective is missing because in such cases the central bank can only be judged on the basis of its own statements.


As transparency should not be left to the discretion of the central bank, the law should prescribe certain procedures for explaining monetary policy. There are various possibilities, ranging from reports, minutes and other communication devices. Transparency will certainly be improved if the monetary authorities have to explain the extent to which they were able to reach the final objectives of monetary policy. In the European case, Article 15.1 of the Statute of the European System of Central Banks and European Central Bank requires the European Central Bank to publish reports on the activities of the European System of Central Banks  at least once every quarter. However, in its attempts to enhance transparency, the European Central Bank has committed itself to go beyond the reporting requirements specified in the Treaty. The President explains the reasons behind the Governing Council’s decisions in a press conference and details of the Governing Council’s views are published in the ECB Monthly Bulletin.  



This paper has argued that at a glance, the concept of central bank independence seems to be in conflict with the democratic principle that government policies should be controlled by elected officials rather than by an elite group that is insulated from the political process. The basic principle of democracy, which expects the public to be able to exercise control over government actions, strongly suggests that elected politicians should decide on the explicit definition and ranking of the objectives of monetary policy. Central bankers should never forget that they are ultimately accountable for their policies to the elected politicians and to the public at large (including future generations). In this respect, it is misleading to think of proper accountability and transparency as a ‘counter-weight’ to central bank independence. On the contrary, accountability is the ‘other side of the coin’ of independence and the two concepts are mutually reinforcing rather than antagonists, as is sometimes suggested. Any weakening of the democratic control over an independent institution may lead to excessive discretion and unclear objectives, which risks creating political backlashes against independence and may overtime undermine independence itself. Therefore, independence is sustainable in the long term only if accompanied by strong accountability and transparency in the operations of the independent institution. The legal provisions can more easily be circumvented if there are no provisions ensuring central bank transparency and accountability.

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