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How independent should central banks be?

Former Governor of the Central Bank of The Bahamas James Smith questioned whether any Central Bank should be truly independent, in light of the Inter-American Development Bank’s (IDB) most recent study that highlighted a lack of transparency and political independence within the institution.

A 2016 study that was recently released in the IDB’s Nurturing Institutions for a Resilient Caribbean report, ranked CBOB relatively low, at 117 out of 179 countries worldwide, in terms of the independence of central banks from political influence: who appoints the governor, whether there is direct government involvement in policy decisions, whether there are limits on the ability of the government to borrow from the central bank and whether price stability is a core objective of monetary policy.

“The crucial question there is how independent should a central bank be? I think the original act that establishes the Central Bank obviously had to go through Parliament, sponsored by the minister of finance. Any amendment to the Central Bank’s policies or the act itself would usually have to be agreed to by the minister of finance,” Smith said in an interview with Guardian Business.

“So, there was always this connection through the finance ministry and therefore the government on any major decision the bank might want to make. Over the years, particularly since the 80s and then following in the 90s, the bank was being pushed by policies by the IMF (International Monetary Fund) in Washington actually about getting more independence, because they didn’t really want monetary policy pushed from the political order.”

This low ranking wasn’t always the case for the CBOB, the report noted, given that the bank showed greater independence than all other country groups in 1973.

“But its level of independence has remained constant over time. By contrast, all other country groups have witnessed continuous improvements over time and, consequently, The Bahamas lagged all comparators by 2012,” the report said.

Smith, who was Central Bank governor from 1987 to 1997, said during his tenure he “personally didn’t see an erosion of independence”, but instead witnessed the bank become increasingly able to set its own monetary policy.

“There were a few amendments that separated the bank’s policies from the government’s policies, nothing major,” he said.

“My own view is that they were becoming gradually more independent, but I think there’s still this nexus on major issues, because if the government favors a particular position, and I believe they have ways and means of having their opinion known and perhaps even influencing it.”

Paige McCartney

Business Reporter at The Nassau Guardian
Paige joined The Nassau Guardian in 2010 as a television news reporter and anchor. She has covered countless political and social events that have impacted the lives of Bahamians and changed the trajectory of The Bahamas.
Paige started working as a business reporter in August 2016.
Education: Palm Beach Atlantic University in 2006 with a BA in Radio and Television News
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