By Gabriel Garang Atem Ayiik
A master economist, John Maynard Keynes, states: “The ideas of economists and political philosophers, both when they are wrong, or right are more powerful than commonly understood.” This explains how the Presidential Decree declaring the independence of the Bank of South Sudan should be understood.
On 30th May 2024, H.E. President Kiir issued a presidential decree calling for the independence of the Bank of South Sudan. The concept of central bank independence dates to the work of 19th-century British monetary economist Walter Bagehot.
Central bank independence is important because the government pursues many competing economic policy objectives. Central bank independence ensures the central bank carries out its monetary policy or any other of its objectives following the law (In our case, the Bank of South Sudan Act 2011, amended 2023) in a manner that prevents political and economic interference by other institutions or persons.
Several theoretical reasons justify central bank independence. Political interference can cause central banks to deprioritize their core policy objectives. The dominance of fiscal policy can divert central banks from their objectives. If not properly regulated, institutions can be exploited by interest groups or cartels to pursue predatory interests. An independent central bank protects monetary policy from inappropriate manipulation or short-term self-interest.
In addition, central bank independence has been criticized for leaving monetary policy in the hands of a small number of unelected officials, for having difficulty separating fiscal policy from monetary policy, and for risking the creation of an unbalanced working relationship between fiscal and monetary policy. Finally, it can lead to institutional rigidities.
So, in the end, central bank independence is important but, as the Presidential Decree states, cooperation between the minister for finance and the governor of the Bank of South Sudan is critical to achieve the overall government’s economic objective. Independence ensures that each agency uses all energies to achieve its objectives using all available policy tools without interference.
Central bank independence may be examined under five pillars: governance, policy target, financial, operational, and human capital. Though the governance, financial, operational, and human capital of the Bank of South Sudan are outlined in the Bank of South Sudan Act 2011, amended 2023, and public finance-related regulations, the “de jure and de facto” independence has always differed in many countries.
The recruitment, roles, tenure of office, and determination of pay for the board, monetary policy committee, and the entire staffing of the central bank are critical dimensions of the central bank’s independence in its governance. The Bank of South Sudan’s Act 2011 and amended 2023 outlined the de jure independence. An independent central bank reports to the president and works with the minister for finance and economic planning to achieve the overall government’s economic objectives while prioritizing monetary policy.
Like any other government agency, an independent central bank is overseen by the Parliament, Audit Chamber, and other government oversight institutions. Separating the monetary and fiscal policies suggests that the Minister for Finance and Economic Planning will have a limited role in the recruitment of the Bank’s leadership, whether it be the board or its key executives. This independence commits the government to respect the tenure of office for the senior management of the Bank and the board, as stipulated in the Acts and other legal frameworks.
There is a need for independence between the monetary policy formulation of the bank and oversight over the bank. The Bank of South Sudan Act 2023 creates the monetary policy committee for monetary policy formulation. The governor chairs both the monetary policy committee and the board. In the spirit of independence, the board should be chaired by a separate board chairman, as in Kenya. Nobody can provide oversight to themselves.
However, the current practice in South Sudan is also common in other countries and remains alive in theoretical and policy debate.
An independent central bank sets its monetary policy without influence from any institution or individual. An independent central bank resists the use of deficit financing that may compromise macroeconomic stability.
The literature shows that in the last forty decades, independent central bank policy delivered macroeconomic stability and outperformed non-independent central banks by achieving a low inflation rate as they set their monetary policy goals. Today, most central bank’s target inflation and instruments to pursue their targeted monetary policy objective, design their operational processes, and finally, have the autonomy to finance their operations to achieve their monetary policy objectives.
An independent central bank communicates with the public about its monetary policy objectives, the rationale behind them, and the data and information related to its performance. An independent central bank has nothing to fear as Fischer (2001) puts it: “Policymakers operating in the light of a day cannot do some of the things they can do in the dark of secrecy.”
An independent central bank should be well-resourced as outlined in the Acts, recruit experts, and operate its systems, policies, and procedures without political influence to achieve financial, operational, and human capital independence. The financial, operational, and human capital management processes are set out in laws and regulations.
Financial independence ensures that the way the bank is financed does not allow it to be manipulated through the power of resources. The Bank of South Sudan Act 2011, amended 2023, is a great legal framework. The order shows the intention of the highest office in the land, but it must translate into economic benefits to be considered substantial.
The biggest challenge lies in understanding which independence is being addressed: the “de jure and de facto?” Hon. Dr. James Alic is a respected economist with a great understanding of South Sudan’s contemporary economic landscape.
H.E. President Kiir chairs the East African Community, and one of the critical requirements for a monetary union is the convergence of economic targets. The order may allow the central bank to model and target indicators that will lead to the convergence of economic indicators to those of East African countries.
More importantly, at home, it may lay the foundation for the modern management of the Bank of South Sudan by giving the Bank the governance, policy, financial, operational, and human capital independence to pursue its objectives with limited political influence from any institutions or individuals.
The author is an economist in Juba South Sudan.