POLICY BRIEF NO. 36 MARCH 2014 CENTRAL BANK INDEPENDENCE IN NORTH AFRICA BESSMA MOMANI AND SAMANTHA ST. AMAND KEY POINTS • Over the past 30 years, North African states have made positive strides toward central bank independence (CBI) that are correlated with overall structural transformations toward economic liberalization. • The Arab uprisings appeared to provide a positive political nudge for advancing statutory amendments toward CBI. • Compared to other emerging market economies and developing regions, there is further room for improvement on achieving the goals of CBI in North Africa. • CBI in North Africa can be strengthened by promoting a learning culture and technocratic BESSMA MOMANI values within the central banks. Bessma Momani is associate professor in the Department of Political Science at the University INTRODUCTION of Waterloo and the BSIA. She is also a senior fellow with the Centre for International Governance Securing CBI has become best practice in global governance. Both the political Innovation (CIGI). and economic literatures suggest that CBI facilitates price stability, promotes transparency to citizens and provides accountability toward the public good. CBI is also credited with protecting the economic and financial system from the trappings of regulatory capture. In addition, a number of scholars have argued that CBI is correlated with positive policy outcomes, including balanced long- term economic growth, stable financial markets and a reduced likelihood of publicly funded financial institution bailouts. Moreover, some have suggested that CBI is important for fostering a healthy liberal democracy. As global markets SAMANTHA ST. AMAND have become increasingly integrated and interdependent, securing CBI is also Samantha St. Amand is a research associate in the Global Economy considered a domestic, regional and global public good. program at CIGI. Her current research focusses on the political economy of The North African region was a laggard among emerging market economies central banking and the international in improving CBI during the 1990s and early 2000s. The impact of the Arab implications of monetary policy. THE CENTRE FOR INTERNATIONAL 2 GOVERNANCE INNOVATION uprisings seems to have provided the necessary push for securing independence going forward. Progress toward CBI for the North African countries of Morocco, Tunisia and Egypt, has been observed as all three countries responded to the uprisings with constitutional reforms. While none of these countries can claim to have achieved CBI to the same degree as some of the central banks of the major advanced countries, they have all instituted some measures toward greater CBI. As many of these countries are on the path toward political liberalization and are implementing economic liberal reforms, the goal of CBI will further ensure economic gains are not lost to potential political interferences. Offering the first policy study on CBI in North Africa since the uprisings, this brief argues in favour of furthering reforms by promoting transparency, meritocracy and an open-learning culture to solidify the modest gains made in CBI in the region. MEASURING CBI CBI is often defined by fulfilling four categories — personnel, policy objectives, policy instruments and financial independence — that reflect an institutional and legal framework allowing central banks to operate in a technocratic and accountable manner (Eijffinger Copyright © 2014 by the Centre for International and de Haan 1996). Governance Innovation The opinions expressed in this publication are those of PERSONNEL the authors and do not necessarily reflect the views of the Centre for International Governance Innovation or its Operating Board of Directors or International Board of CBI is ideally characterized by personnel Governors. independence, where a government’s role in either appointing or dismissing the central bank’s governor and board is limited; the term of the This work is licensed under a Creative Commons governor and board is preset and legally defined; Attribution-Non-commercial — No Derivatives Licence. and the representation of the government on the To view this licence, visit (www.creativecommons.org/ licenses/by-nc-nd/3.0/). For re-use or distribution, please board of governors has an arm’s length relationship. include this copyright notice. WWW.CIGIONLINE.ORG POLICY BRIEF NO. 36 MARCH 2014 CENTRAL BANK INDEPENDENCE IN North AFRICA 3 However, best practice in personnel independence decisions. This form of financial independence is does not completely remove the government’s role important for restricting central bank financing of the in determining the composition of the governor and government’s budget deficit. board. Instead, the government can have a role in the Best practice requires that these CBI features be appointment process, but the length of their terms are constitutionally established or codified by central predetermined and should not be altered by political bank statutes; therefore, our analysis will mainly whims or changes of government. In addition, rely on the de jure independence of central banks in government representatives should not be members North Africa. A number of legal scores or indices are of the central bank’s board of governors so that they available to measure CBI. Legal measurements are cannot influence the bank’s decision-making process. useful in that they provide a good basis for comparison across countries. There are, however, some caveats POLICY OBJECTIVES with these measurements. The coding, weights and CBI is ideally characterized by a central bank having criteria used in the score or index are subjective, and safeguards on amendments to its policy objective. consequently there can be a weak correlation between Generally, best practice for CBI includes a primary different legal indices. Furthermore, the degree of de monetary policy objective of maintaining price jure independence does not necessarily reflect its de stability and this objective is either constitutionally facto levels. This is particularly a concern for emerging entrenched or cannot be frequently reassessed by an markets and developing economies that do not have the incumbent government. same level of abidance to its laws or are more exposed to corruption. The legal measurements, nevertheless, do provide a good basis to compare progress within POLICY INSTRUMENTS regions or countries and will be a starting point for A related element of CBI is to ensure that the central comparison in this brief. bank has autonomy for achieving its monetary policy objective through policy instrument independence. CBI IN NORTH AFRICA Instrument independence refers to the bank’s ability to use the tools and methodology that it deems appropriate After years of strong statist involvement in economic to pursue its targets and objectives. affairs and relatively closed economies to trade, many North African countries underwent extensive economic and institutional reforms in order to pursue FINANCIAL INDEPENDENCE greater integration with the world economy. This Financial independence limits the interdependence of generally commenced during the 1990s, as North Africa the government and central bank in budgetary matters. underwent modest economic liberalization. Much of the This precludes the central bank from lending to the pressure in the 1990s came from international financial government or having a role in determining fiscal policy. institutions (IFIs) to liberalize the statist economies. The It also includes considerations for whether the central International Monetary Fund (IMF) had successfully bank’s budget is subject to executive or legislative pushed for CBI in its loan conditionality with debtor WWW.CIGIONLINE.ORG POLICY BRIEF NO. 36 MARCH 2014 THE CENTRE FOR INTERNATIONAL 4 GOVERNANCE INNOVATION members such as Morocco, Tunisia, Egypt, Jordan and a CBI in the late 1990s and early 2000s. In Sub-Saharan number of others that were signed in the 1990s. Africa, economic liberalization reforms, which were arranged as part of debt rescheduling agreements By the 2000s, countries throughout North Africa were with IFIs, also led to improvements toward CBI. becoming more hospitable to foreign investment, Hyperinflation, coupled with severe recessions, led privatized state-owned assets, reduced fiscal budgets, many countries in Latin America to secure higher levels tackled inflation, expanded export-oriented trade of CBI in the 1990s (Gutiérrez 2003). and increased protection on intellectual property rights, and proceeded to actively trade with the global The economic and external push factors that have economy. Much of the gains in this time period were generally motivated reforms in other emerging attributed to free trade agreements (FTAs) signed with market economies and developing regions were key trading giants. For example, many of the North less pronounced in the MENA region. Despite some African countries signed the Agadir Agreement in external push for economic liberalization in the 1990s 2004 with the European Union in the hope of fostering by IFIs and by conditions placed on North African intraregional trade and policy harmonization. countries by larger trading partners, these liberal Encompassing Tunisia, Egypt, Morocco and others, reforms did not spill into central bank reforms. the agreement would create a free trade zone in the Having missed the opportunity to achieve CBI as part Middle East and then link the region to the European of the liberal economic reforms of the 1990s,