Time to rethink BoB�s mandate?
Mmegi Editor | Thursday July 13, 2017 11:44
Outraged economists, bankers and other monetary policy experts reacted strongly to the Public Protector’s recommendations, with several lawsuits being filed amidst reports of fixed capital flight and rand erosion in that country.
That dust-storm aside, the goings-on in South Africa echo a similar debate in the local economy a few years ago that was effectively muted by the then leadership of the Bank of Botswana (BoB).
At present, the BoB’s primary mandate, as prescribed in its founding Act, is to ‘promote and maintain monetary stability’, by, in part, maintaining the purchasing power of the currency through managing inflation. Other priorities in the BoB mandate include ensuring a stable financial system and an efficient payments mechanism among others. Its last priority however, and one that is at the crux of the South African debate, is the use of monetary policy to achieve national economic development goals.
The BoB Act says this is permissible ‘insofar as it is not inconsistent with’ the major priorities.
While placed last, this part of the mandate is critically important to the general citizenry who look to institutions such as the BoB to ensure the efficient transmission of monetary policy to bread and butter issues such as employment creation, wage growth and savings expansion.
While many of these issues are affected by the ‘price stability and stable financial system’ mandate the BoB pursues, there is scope for revision of the central bank’s mandate, particularly in light of the failure of monetary policy transmission in recent years.
Households have suffered restrained growth in incomes and high indebtedness for several years now and while this has led to lower inflation, which is a BoB priority, it has also meant muted non-mining growth and lower banking profitability. Simply put, disposable incomes among Batswana have not risen enough to support the various economic activities (goods and services) dependent on household demand.
Even the BoB’s lowering of interest rates has not translated to higher demand, due partly to this low real wage growth in households and high. This is just one example of policy transmission failure and mandate inefficiencies. Due to its mandate restrictions, the BoB cannot iron out these creases, either directly or through advice to government and as a result, monetary policy fails to serve society. A reprioritisation of the BoB’s mandate is possible, one that does not necessary lose sight of the Bank’s chief role, but does consider the ‘socio-economic well-being of citizens’.
Today’s thought
“One of the great mistakes is to judge policies and programmes by their intentions rather than their results.”
- Milton Friedman