- Susana Almuina, Ian McCarthy, Gabriel Sensenbrenner, and Justin Zulu
- Published Date:
- December 1995
The joint meetings afforded the participants a historic opportunity. The IMF had learned from the technical assistance coordination meetings at the Bank for International Settlements (BIS) the importance of getting feedback from the donors, and in St. Petersburg getting feedback from the recipient countries had been equally vital. It was appropriate to take stock of the last two years’ work and cooperative efforts through these joint meetings, exchanging the knowledge and experiences of both sides. This was the first occasion on which both donors and recipients of technical assistance have been able to sit together and in a candid fashion share thoughts, strategies, and experiences.
The results of the joint meetings have been inspiring. The cooperating central banks confirmed their continued support to IMF leadership regarding the provision of technical assistance in the area of central banking. The feedback received was most valuable and timely and would sharpen future design and delivery of technical assistance. In this respect the preparatory work for the meetings by all the participants had been time well spent.
There had been consensus that technical assistance was in the period of implementation of the ideas and recommendations formulated jointly by the authorities in each central bank and the IMF-coordinated missions. In that phase there was also increased emphasis on the transfer and acquisition of skills and practices. The bilateral relations that had been established between donor and recipient became even more important, because the cooperating central banks had a comparative advantage in the training area. The IMF would strengthen its contribution by using technical assistance workshops more intensively. At the same time, the IMF would continue to support the Joint Vienna Institute’s efforts. As a follow-up to the exchanges on “The Role and Independence of the Central Bank,” a human resources technical assistance workshop was being planned to address the critical task of personnel development and the management of human resources. As a consequence of the meetings, the IMF’s agenda expanded, and the planned workshop on human resources development was enthusiastically received by participants.
The cooperating central bank participants commented on the problem of coordinating technical assistance provided by experts from widely differing systems. This problem punctuated the importance of IMF coordination. In some instances, coordination between international financial institutions had been more of a problem than that between central banks and the IMF. The IMF was very conscious of the need to blend advice, rather than duplicate the systems of individual experts’ central banks, and this accounted for the reason why the IMF had convened coordination meetings of experts in all the operational subjects of central banking as a prerequisite to organizing technical assistance workshops. There was a need to strike a balance between the various systems of the donor central banks and the priority needs of the recipient central banks and their particular circumstances.
The cooperating central banks stressed the point that their experts performed important tasks in an uncertain and demanding environment. To make their work efficient and effective, clear terms of reference and adequate knowledge of the policy strategy pursued by the IMF’s various departments were essential elements. Continuity of interlocutors on both sides was also emphasized in order to facilitate a fruitful dialogue between the providers and recipients of technical assistance.
Together with continuity, commitment on the recipient side to implementing recommendations on a broad scale to establish institutions appropriate for the proper functioning of a market economy was viewed as essential to succeeding in the economic transformation process. A lag in reforms in some areas of central banking could risk delaying progress in other areas and therefore in the ability of the new banks to function properly.
The cooperating central banks stressed the limited nature of their resources. There was an issue of public accountability regarding the use of resources for technical assistance, and it was necessary to ensure that the assistance was appropriately targeted and effective. In this context, they stressed the importance of continuity of interlocutors in the recipient central banks to reduce the difficulties experienced when there was too rapid a turnover of key personnel. This was of particular importance when hands-on training was becoming more central to the technical assistance process and the economic transformation in general and must be transferred effectively.
Some cooperating central bank representatives expressed concern about a tendency of shopping around for technical assistance by some recipients, who had been approaching several different donors for assistance in the same field. There was a definite risk of duplication and inconsistent advice in that approach. Other representatives added that, while in favor of competition in principle, such shopping around was undesirable, since there was no explicit market price for technical assistance.
Several central bankers from the recipient countries sought for greater understanding and patience. They pointed out that the economic and political situation of their countries made it difficult for them to rapidly and effectively implement the recommendations of the technical assistance missions and experts. Many key aspects of the transformation process were not under the control of the new central banks, for one thing. For another, and as an example, failure on the part of parliament to pass banking legislation promptly held up rapid progress of implementation of technical assistance. Nonetheless, they expressed firm determination to continue to implement reforms. They admitted that the rapid turnover in staff had been a major, but hopefully temporary, problem. It was difficult to offer competitive salaries to central bank staffs, given the enormous differentials between private sector and public sector salaries. However, some former central bank staff had begun to return after finding the private sector less secure and fulfilling careerwise.
There was a clear sense of optimism on the part of the recipients. There had been noticeable progress, particularly in the core areas of banking supervision, accounting, foreign exchange, and monetary operations, though the rate of reform had varied widely between countries and there was an increased divergence in the rate of progress between the recipient central banks. The recipient central banks welcomed the technical assistance efforts to date, but also believed that there was much left to be done.
On the part of the donors, there seemed to be a general consensus on the need to quantify the level of resources expected and available and some support for a system of explicit reviews of progress. In this context, the Monetary and Exchange Affairs Department of the IMF had increased stress on action plans, and country managers had been instructed to continually review the state of progress. This also highlighted the importance of installing resident advisors who could monitor and facilitate, on a day-to-day basis, coordination and cooperation, and the effectiveness of such advisors were confirmed by the recipients.
As the task of establishing modern central banks progressed, the role of other international financial institutions became critical. The participants from these institutions pointed out at the meetings the distinct comparative advantages each one of them possessed. It was, therefore, desirable that all the parties continue to coordinate the efforts effectively, in order to maximize the economies of complementarity. The participants listened carefully to the views of Messrs. Truman and Talmaci summing up on behalf of the donors and recipients, respectively. The Monetary and Exchange Affairs Department would incorporate the concerns and exhortations in its work. It was also important to keep in mind that the final purpose of IMF-coordinated technical assistance was to build institutions and structures which would contribute to the design and implementation of sound economic policies. There was a long and arduous path to follow in adjusting the economies of the Baltic countries, Russia, and other countries of the former Soviet Union, and effective and timely technical assistance in central banking could play an important role in strengthening the formulation and implementation of effective monetary policies in support of adjustment programs. In addition, there was both the political will and a commitment of resources by the cooperating central banks to ensure that the efforts of the recipient countries to reform their economies were supported and that they succeeded.
The meetings highlighted the importance of having clearly identified interlocutors who could help coordinate technical assistance in the recipient central banks. In that context, it was hoped that the links established during the joint meetings would endure and become fruitful. Effective coordination of technical assistance was a shared responsibility of both donors and recipients. Furthermore, an opportunity had been created for future bilateral and multilateral interaction and networking between the 38 central banks and their staffs represented at the meetings.
In the course of discussions, several participants stressed that recipients could play an increasing role in helping each other to implement reform. The club of central bankers was viewed as an evolving process of communication among professional interests and not a static entity. It was important that the ultimate objective be kept in sight, namely, that the reform of central banks was designed to help promote conditions for growth and economic and financial stability and not as an end in and of itself.
The animated discussion on central bank independence was truly unique, and the participants, while already convinced of the importance of such independence, dwelt on the strategies and actual practices to best realize the objective. It was clear that the de facto independence was, in the final analysis, more important than the de jure situation, although adequate provision regarding the independence of central banks was important when drafting the legislation. The issue of the independence of the central bank would continue to occasion considerable debate in central banking circles given the renewed interest and analysis regarding the role of central banks in many parts of the world today.
The participants, however, differed in their interpretation of what central bank independence meant, in particular, their views regarding the necessity for and desirability of coordination of policies between the ministries of finance and the central banks. Some participants were opposed to or skeptical about coordination with the ministries of finance, since this might compromise the independence, while others argued the practical necessity for such coordination. But it is fair to say that the differences generally reflected national experiences and practices. Several participants stressed the necessity for a central bank to continuously earn its independence and stressed that in that respect the caliber of the central bank’s staff was of vital importance. The need to pay proper attention to the development of the competence and integrity of the staff was clearly recognized.
As for the countries in transition, they were grappling with daunting macroeconomic problems. Major structural adjustments were required, reflecting both the transition to market economies and the external shocks that the breakup had produced. In very difficult circumstances, valiant efforts were being made to adjust. However, the temptation to find quick solutions, including financing imbalances via the printing press, would be a turn in the wrong direction. Going that route, when the production and distribution systems were facing major, if temporary, distortions, would only exacerbate inflationary pressures.
The precise role and the degree of independence that should exist for each of the new central banks were, therefore, a matter of debate. Some observers had argued that the situation facing these banks was sui generis and that the roles set for central banks in market economies and the degree of independence enjoyed were inappropriate for the Baltic countries. Russia, and other countries of the former Soviet Union in the existing circumstances. The IMF view was that there were common factors and good grounds for arguing that the basic role of a central bank and the degree of independence that it should exercise were not qualitatively different for these countries. While there were structural differences between the two situations, the transitional adjustments need not and should not necessarily conflict with the longer-term objectives.
In the last analysis, the central banks would have to convince their governments, and subsequently the public at large, of the benefits of low inflation and the benefits of independence. One of the ways to achieve this was by acquiring a comparative advantage in formulating and implementing monetary policy.
The representatives of the recipient central banks therefore accepted the need for independence but stressed the practical and political constraints they faced which tended to circumscribe a fuller exercise of the application of the concept. Therefore, to them the de jure aspects were crucially important in order to be more firmly grounded in an appropriate framework. They also pointed out the difficulties incurred by subordination in many cases to parliament, as opposed to the government. It would appear, to some of them, that subordination to parliament might even be less desirable than subordination to the executive branch. But most importantly, the joint meetings underlined the importance of the central bank in facilitating the transformation of the economies of the Baltic countries, Russia, and other countries of the former Soviet Union into market economies. The central bank was by all counts the centerpiece of the evolving financial and monetary system in countries in transition.
The reason why central bank reform was so critical was because of its role to help promote growth and economic and financial stability. With the possible exception of a minuscule number of countries, a high rate of inflation had always been counterproductive, and it was difficult to envision stable and sustainable growth in such an environment. At the same time it was necessary for the central bank to ensure that the public did not perceive the central bank as the cause of the problem, but rather as an agent for solving the problem.
Finally, it was necessary to give some thought to where the joint meetings would go from here. The discussions had shown that there was no substitute for personal contact and that it was important to continue to build on the communications and the work that had been accomplished. The donors had come to the realization that there was a learning curve in the reform process of countries in transition and that it would take time for recipients to get up to speed. The recipient central banks became more aware of the long road ahead but also the commitment of the donors to continue to assist. The recipients also reflected on the need and possibility of organizing a meeting of central bankers from the Baltic countries, Russia, and other countries of the former Soviet Union. The IMF indicated that it would reflect upon what had been learned during the meetings and stay in close touch with both donors and recipients. Follow-up meetings could be envisaged to review progress and compare notes, after an appropriate lapse of time.