Said the Governor of the Bank of Botswana (BoB), Moses Pelaelo, at a media briefing this week: “Part of improvement in processes and so forth are linked to the kind of monetary policy regime that we currently have….we explained that we are continuously reflecting on improvements to be made.”
The Governor was responding to a Business Weekly & Review question about improving transparency around the Monetary Policy Committee’s (MPC) decision on interest rates and subsequent communiques that followed. Precisely, will BoB provide details of how MPC members voted and the extent of rate increase/decrease that members wanted? “What you are suggesting is a possible improvement,” Pelaelo responded briefly. A newly amended BoB Act dictates that the MPC shall adopt decisions by a simple majority of members present and voting at the meeting. In the event of a tie, the Governor shall have a casting vote in addition to his deliberate vote.
Deputy Governor Dr Kealeboga Masalila had rightly emphasised the theme of transparency of frameworks and the need for the central bank to be accountable. In countries like South Africa and the US, it is common practice for central banks to publish how members voted in an interest rate decision and observers think it is a good practice to emulate. “Yes, we will get there,” Pelaelo said. The MPC shall comprise the Governor who will remain its Chairman, the deputy governors, the head of the department responsible for economic research of the central bank, the head of the department responsible for treasury operations of the central bank and four persons appointed by the minister.
The four members, according to the Act, will not be employees of the Bank of Botswana but possess knowledge and experience relevant to the functions of the MPC. Under the current dispensation, MPC members are all staffers of the central bank. A key question raised at the briefing was whether an appointment made by a minister would not impact the performance of the MPC. Deputy Governor Masalila thinks not because “the law states who can qualify to be a member of the MPC”.
In terms of operating rules, he said, it is important that while qualified, there is no pursuit of individual interest by any member of the MPC. For him and the central bank’s officials, it is about the conduct of monetary policy for attainment of policy objectives. Observers opine that a minister being allowed to appoint member from outside may take away independence which might affect decisions being made or politicise them. The observers argue that it would have been better if they left it to a board vote.
In the new law, the monetary policy and exchange rate have been taken away from the board and are vested in the new MPC. Governor Pelaelo said this was important “so we insulate monetary policy from any political interference, any sectoral interest and any other matter and that it remains with the competence of the people and infrastructure that the central bank has put in place”. Changes have usually been effected at the start of the year by the president — although BoB and the finance ministry recommended the changes. Governor Pelaelo spoke of an elaborate section of the law on conflict management. “Remember (that) part of dealing with institutions of the central bank is that there are all kinds of conflict of interest,” he said. “First level is to look at how people conduct themselves. These conflicts are embedded in the law.”
These include a cooling off period. An important one he mentioned was handling policy conflicts. In terms of the law, in the event that the central bank is pursuing a policy that the government thinks is not consistent with the inflation objectives in place, the minister can escalate the matter with the Governor. Where there is a difference that the two cannot resolve, the matter is escalated to the President, who will have only three months to deliberate. If the President does not do so within the prescribed time, the position of the Bank of Botswana prevails. Unlike before, the government – through Ministry of Finance – will determine the inflation objectives under the new dispensation. “This is what we all agree as a country as to what the level of inflation that can be consistent with achieving sustainable economic growth will be,” said Pelaelo. “Government will then say, Governor, now do what is necessary within your intellectual power, infrastructure or whatever tools to ensure what we have set for you.’”
Masalila emphasised that the decisions of the MPC are in a disciplined framework: they follow closely an analytical framework which currently is called forecasting and policy analysis. “That provides a disciplined approach to what is being debated and how you approach discussions in MPC,” said Masalila, adding that there are also a set of instruments which are “your levers”. “So you cannot not grasp at other things not the set of instruments within the purview of the monetary policy,” he continued. “Obviously then there can be judgements around what you think inflation or growth is going to be, what you think about inflation and what you think about the direction of inflation and therefore the response and quantum.”
The central bank will be judged on an externally determined inflation objective. One of the key issues that the bank really wanted to address in terms of governance is clarity of the central bank’s mandate. Pelaelo said there is now clarity in the law regarding what is the priority and how this and many other things rank. “In the new Act there is clarity of the primary objective of the central bank as (a tool of) price stability and then financial stability has been brought in,” said the Governor. Another important matter was distribution of decision-making power between the board, the MPC and the Governor with respect to price and stability. “There will now be detailed functions of the board in the Act,” Pelaelo explained. “That will be clearly articulated, and then there will be clearly defined powers for the Governor. Of course, now they separate the role of the Governor as the Chair and CEO.”