VI Legal Infrastructure: Central Bank Autonomy

Jean-Pierre Briffaut, George Iden, Peter Hayward, Tonny Lybek, Hassanali Mehran, Piero Ugolini, and Stephen Swaray
Published Date:
October 1998
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A key requirement for the development of the financial sector is an institutional environment that is conducive to the effective and efficient formulation and implementation of monetary policy. The regulatory and operating frameworks within which financial systems operate must be simple, unambiguous, transparent, and sound. With regard to the regulatory framework, the legislations governing the conduct of banking business must follow sound principles. Given that the central bank acts as the nucleus of the financial system, the central bank law, particularly, needs to be clear and precise and must support the development of the financial sector. Specifically, the law should be clear about the primary objective of monetary policy and how to achieve it. On the basis of a growing body of empirical evidence, it is now generally accepted that the primary objective of monetary policy should be price stability and that authority over the pursuit of this objective should be conferred on an autonomous central bank.13 If the authority over monetary policy, and in particular its implementation, is delegated to an autonomous central bank having sufficient authority to pursue price stability, uncertainties about price signals are minimized as the signals become more reliable. Not only will this lower inflation and keep it from rising again, but it will also help in allocating resources efficiently, leading to high and sustainable output of goods and services. The question then is, to what extent have sub-Saharan African countries been able to meet the requirements of an institutional framework that is conducive to financial sector development?

During the 1990s, these countries took steps to modernize their central banking laws, which had initially been created in the 1960s and 1970s when central banks were being established. To date, approximately one-half of the selected countries have amended or completely revised their laws, while some others are currently discussing amendments to them.

To a certain extent, while the new laws have increased the autonomy and accountability of central banks, none of the selected central bank laws meets all the indicators that are typically used to measure autonomy. In this study, the following indicators have been used: first, the primary objective of the central bank should be price stability; second, the central bank should be given sufficient authority to implement monetary policy without direct government interference; third, the governor and other members of the bank's governing bodies should be isolated from short-term political influence; fourth, the economic autonomy of the central bank should be guaranteed by provisions that limit direct credit to the government, prohibit the central bank financing of quasi-fiscal activities, and ensure that the central bank is financially sound and solvent; and, finally, central bank accountability should be ensured through provisions requiring prudent reporting on both monetary policy and the financial condition of the bank.

On the basis of these indicators, a single, un-weighted legal index of central bank autonomy was developed for this study (see Appendix I, Table A1). There are, of course, different ways of measuring autonomy, and a legal index of central bank autonomy may have some element of arbitrariness, partly because very different factors are combined into one indicator and partly also because practices, as they develop, may not be fully reflected in the central bank law.

When the index was correlated with inflation rates in the selected countries, increased central bank autonomy was found to be associated with lower inflation. However, central banks without much autonomy were still able to achieve relatively low inflation, but only when the government's monetary policy was sound and credible. The ability to achieve relatively low inflation may have been facilitated by their having a fixed exchange rate policy or an IMF program (see Appendix I, Table A9). Nevertheless, increased central bank autonomy, in general, further increased credibility in monetary policy and thus reduced inflation. As Table 5 shows, most sub-Saharan African countries still confer only limited autonomy on their central banks in the conduct of monetary policy.

Table 5.Degrees of Central Bank Autonomy for Selected Sub-Saharan African Countries, 1997
Group 1Group IIGroup III
BEACNamibia*South Africa

Note: indicates that the central bank law is currently under review. See Table A1 for index of autonomy. I: Index is less than 12; II: Index is between 12 and 14; III: Index is 15 or greater.

Note: indicates that the central bank law is currently under review. See Table A1 for index of autonomy. I: Index is less than 12; II: Index is between 12 and 14; III: Index is 15 or greater.


An autonomous central bank should have a single objective, or, at least, one clearly defined primary objective, to avoid becoming subject to conflicting interests that cause time-inconsistency and credibility problems. A clearly defined objective provides the central bank with some implied powers and also yields a more precise basis for holding the central bank accountable for its monetary policy actions. Furthermore, price stability is, in the final analysis, conducive to sustainable real growth.

All the selected sub-Saharan African countries have as an objective either price stability, the value of the currency, or monetary stability. However, only a few of the central bank laws (those of Angola, Kenya, Madagascar, South Africa, and Tanzania) give price stability explicit priority. Unlike many countries, South Africa includes price stability as part of its constitution.14 The other central bank laws include price stability or maintaining the internal and external value of the currency as part of other objectives. It is thus difficult to know which objective is accorded priority at any given time or to hold the central bank accountable for its monetary policy actions. However, some of the amendments currently being discussed, for instance, in Mauritius and Zimbabwe, give price stability explicit priority.

As is true of central banks in general, all the selected sub-Saharan African central banks also seek to ensure a safe and efficient financial system, including the payments systems. Safeguarding the integrity of the financial system is critical for the transmission of monetary policy signals. Hence, the obligations to ensure price stability and a safe financial system will often complement each other, but they could also conflict, particularly in the short run. Experience indicates that expansionary monetary policy intended to mitigate problems in the financial sector often ends up aggravating them. For example, if borrowers, banks, and the general public believe that the government and central bank will always bail out problem banks, there is no incentive to deal promptly with underlying structural problems. Therefore, efforts to ensure a safe and efficient financial system should generally be subordinated to price stability, because price stability itself contributes to a sound financial sector.

There are both benefits and costs in letting the central bank conduct banking supervision, but in countries with less developed financial markets, the benefits may outweigh the costs.15 In particular, given that the central bank is the lender of last resort, close coordination is always necessary, and skilled banking supervisors who are immune to political pressure are crucial for efficient supervision. In the selected countries, with the exception of those in the CFA franc zone and Madagascar, the central banks are in charge of banking supervision. Indeed, in Angola, Ethiopia, Lesotho, Namibia, Malawi, Tanzania, and Zambia, the central bank also supervises other categories of financial institutions, such as building societies and insurance companies.

Although overall authority for supervising the banking sector may rest with the central bank, in some countries responsibility for licensing financial institutions either is shared between the central bank and the ministry of finance or takes place in consultation with, or with the approval of, the minister of finance or even the prime minister. This setup is likely to make accountability difficult and increases the risk of relying on purely subjective criteria for the granting of licenses and may even encourage rent-seeking behavior in the process. Thus, the banking supervisor's authority should be made clear and objective and must include sole authority for granting and revoking licenses.

Political Autonomy

Political autonomy, that is, independence from government, makes the central bank a more credible agency.16 In this regard, three features are important in determining the degree of autonomy delegated to the central bank: the structure of the governing bodies of the central bank, the manner in which coordination is ensured, and how conflicts between the government and the central bank are resolved.

Coordination and Conflict Resolution

Coordination between the central bank and the government is essential for the proper functioning of the economy. However, it is important, when conflicts arise between the two, that they be resolved in a transparent way. If a central bank can be overruled by the government or if the central bank's authority is at times limited by factors outside its control, there should be legal provisions that make it absolutely clear to the public that the central bank can no longer be considered accountable for the results of the monetary policy pursued. Such an institutional frame-work guarantees that the public will be notified in time about policy intentions and that the government will justify its policy choice publicly. Some of the selected countries in sub-Saharan Africa—namely, Botswana, Kenya, Namibia, South Africa, Tanzania, and Uganda—have clearly defined provisions in place to ensure conflict resolution. In these countries, the government can instruct the central bank to pursue a specific monetary policy, but only if it is geared toward price stability. In any case, both the government and the central bank must prepare statements, which are presented to the legislature and published. In some other countries, there is no formal legal obligation to ensure that these divergences are published. In a few of the countries, no conflict resolution provisions at all are in place. In Malawi, for instance, the president can replace the members of the governing bodies of the central bank at any time, implying that in practice the government can instruct the central bank.

Governing Bodies

The Governor

The governor, as chief officer, is usually responsible for implementing monetary policy; it is therefore critical that he or she be separated from day-to-day political influence. Thus, the governor should be appointed for a term longer than the political election cycle, and it must be stipulated that he or she should be dismissed only for breach of qualifications, misconduct, or unsatisfactory performance.17 In almost half of the selected countries, the governor's term is longer than four years, which is the usual election cycle. In some extreme cases, such as Ethiopia, the governor does not have a fixed-term appointment. However, while most of the laws define breach of qualifications and misconduct as grounds for dismissal, only a few explicitly state that these are the only reasons for dismissal. A few other central bank laws, however, allow dismissal only for a “just cause,” as in Mozambique, but this leaves room for interpretation, particularly if no clearly defined provisions for conflict resolution are in place. In some countries, including Botswana, Kenya, and Lesotho, one possibility is to allow dismissals to be tested in court or by a special tribunal to avoid arbitrary dismissals resulting from conflicts with the government. Dismissals could even require approval by the legislature.

Credibility may be further improved if the governor is nominated by one body—say, the board—and appointed by another body—say, the head of state. In Lesotho, Namibia, South Africa, and Swaziland, either the minister of finance, the prime minister, or the cabinet nominates or advises, and the head of state appoints, the governor. In Zambia, the president appoints the governor subject to the ratification of the national assembly. In several other countries, however, the same body, often the head of state, nominates or appoints the governor.

The Board of Directors

Monetary policy decisions should be made by a body that reflects a broad range of views. The number of board members ranges from 6 in Namibia to 14 in South Africa. In Angola and Mozambique, there is, in addition to the board, a smaller advisory committee or a consultative body, which may include members of the board and some experts.

Cooperation with the government on monetary policy can be ensured without direct government representation on the board. It is achieved through provisions that stipulate that the central bank and the government shall consult with each other but that the central bank shall not accept instructions unless publicly announced. Thus, it is not necessary to have government representatives or public officers on the board. The only countries that follow this practice, however, are Angola, Madagascar, Mauritius, South Africa, and Zimbabwe. In some countries, a representative of the minister of finance participates in meetings and makes motions, but has no right to vote, as in Kenya and Zambia. In several other countries, however, the representative of the minister of finance has the right to vote. Although most of the remaining countries limit the number of public officers that can be directors, there is no such explicit restriction as in Uganda. To avoid vested interests, most of the countries have provisions in place to prevent officers and shareholders in financial institutions from becoming members of central bank boards. Nevertheless, if the main role of the board is to monitor the central bank, then it may not be harmful to have some government representatives on the board. As an alternative, a special audit board may be established, as in Angola, Botswana, Mozambique, and Rwanda.

The appointment procedures of board members in Madagascar are interesting because the head of state, the government, the national assembly, and the senate each nominate two members, while the council of ministers actually appoints them. In South Africa, the approximately 670 shareholders of the Reserve Bank elect half of the 14 directors, who come from different sectors of the economy. While these are interesting variations, in the vast majority of other cases either the minister of finance or the head of state both nominates and appoints the directors.

To further avoid any potential influence on members of governing bodies, several of the selected central bank laws stipulate that remuneration is set at the outset of a term and cannot be changed to the disadvantage of a member during the term. To buttress this practice, in Rwanda, for instance, the governor continues to receive his salary one year after his term ends. During this period, the governor is forbidden to assist public or private enterprises.

Economic Autonomy

The central bank should be protected from pressures resulting from government policies that de facto limit the central bank's authority over monetary policy. For example, the authority of the central bank is diminished when it suffers losses resulting from the government's quasi-fiscal operations, which the government is not legally obligated to absorb in the budget.18 To avoid these losses, some central banks may run their operations with the primary, if not sole, objective of making a profit. This practice may in many cases conflict with the objective of price stability. Also, a central bank law should ensure that monetary policy can be separated from fiscal and exchange rate policies in a mutually consistent manner. Central banks should thus have the right instruments in sufficient quantities to manage the overall level of liquidity in the banking system.

Credit to the Government

Restrictions on monetary financing of the budget deficit make it possible to separate monetary and fiscal policy and to leave sufficient authority to the central bank.19 Without explicit limits on credit to government, the central bank should not be made responsible for price stability.

All the sub-Saharan African countries in the study, with the exception of South Africa, have provisions that explicitly limit direct credit to the government. However, a few of the laws stipulate that the limits should be set through an agreement between the central bank and the government at the beginning of each year (for instance, Ghana). This arrangement may create some uncertainty in inflation expectations. But where there is strong seasonality and a timing mismatch in the flow of the government's revenues and expenditures, and where only a nascent market for government securities exists, it may be acceptable to allow small temporary access to the government.20 The limit of advances varies from 5 percent of the previous year's revenue in Botswana and Kenya to 25 percent of estimated annual revenue in Mauritius. However, the more direct credit to the government a central bank can extend, the less likely it is that the central bank will be able to neutralize the monetary and inflationary effects of such credit.

Central bank advances to government should be repaid as soon as possible, certainly within the financial year. Admittedly, some spillover into the next financial year may be needed because of uncertainties regarding revenue and expenditure projections. Many of the laws allow advances to be repaid within three to six months of the new financial year.

Some countries—such as Ethiopia, Madagascar, Mauritius, Swaziland, and Tanzania—set an explicit limit for indirect financing, including the part of the central bank's portfolio resulting from open market operations. A few other countries, such as Namibia, set an aggregate limit for all loans and advances. This limit may be very useful if the central bank is the major player in the market for government securities and can thus perceptibly influence the interest rate of government securities through its actions. One way to exclude operations conducted with the sole purpose of managing the liquidity in the system is to exempt open market operations for monetary policy purposes.

Loans and advances should bear market-related interest rates, which, in principle would encourage the government to approach the financial markets in the first instance. In a few of the selected countries, such as Kenya, the law explicitly stipulates the use of a market-determined interest rate, while in the vast majority of the other countries, the central bank is allowed to set the rate, as in Mauritius. Most central bank laws explicitly prohibit the central bank from participating in the primary market, but all the selected central banks can participate in the secondary market.

In many developing countries, central banks get involved in quasi-fiscal activities that result in severe losses and thus eliminate whatever autonomy they might otherwise have had. Activities such as undertaking foreign borrowing on behalf of the government, financial sector restructuring that gives rise to the central bank's taking over nonperforming debt, guaranteeing an unsustainable exchange rate, financing development activities, and conducting banking functions for state-owned commercial corporations can cause significant losses. These activities should be separated from the central bank to improve transparency and avoid endangering monetary stability. Several sub-Saharan African countries nevertheless allow quasi-fiscal activities in their laws—in particular, for development purposes (Malawi, Swaziland, and Uganda). In some countries, the central bank's involvement in institutions to develop the economy is explicitly limited.

Exchange Rate Policy

Monetary and exchange rate policies are closely related. Even without a free-floating exchange rate regime, the central bank can achieve sufficient authority over exchange rate policy. The law should stipulate that the central bank shall report on significant changes in the level of reserves and the causes of this development and suggest measures to the government to mitigate the situation if the foreign exchange reserves reach critical thresholds. If the central bank can determine the exchange rate regime, then there is no conflict. Most central bank laws, either explicitly or implicitly, allocate the right to oversee the exchange rate regime to the government, often with an explicit requirement for consultation between the central bank and the government, as for instance in Botswana, Malawi, and Uganda. However, a few of the more recent central bank laws allow the central bank to actually formulate the exchange rate policy, as in Kenya and Tanzania. In Botswana, the government reports when the exchange rate policy becomes unsustainable, and the central bank can in principle then denounce its responsibility for price stability in accordance with the provisions for conflict resolution. In most countries, however, the central bank is required to report only problems in ensuring reasonable levels of foreign exchange reserves. Unfortunately, if the government does not react, most countries do not legislate when the central bank can temporarily abandon its objective of price stability. A few countries have adopted provisions to further improve trust in the currency, mainly through backing requirements, as, for example, in Mauritius and Swaziland.

Financial Conditions

Financial provisions should ensure that the central bank does not become subject to indirect influence from the government, which could happen if the central bank received frequent appropriations from the government. Without provisions to ensure the solvency of the central bank, insufficient profits could encourage the central bank to pursue higher inflation or to use direct monetary instruments that may function as implicit taxes. The laws in the sub-Saharan African countries stipulate that the central bank can make prudent provisions and allocations to general reserves before the residual profit is transferred to the government. In most of the selected countries, a share of profits must be allocated to reserve funds until such reserves reach a certain ratio of the initial capital. In Botswana, however, the central bank in consultation with one minister determines the allocation of net profits. Another means of ensuring the financial viability of central banks is the following: given that most of the countries have experienced high inflation in the past, the level of general reserves retained is related to the central bank's monetary liabilities, as in Malawi, because this approach better reflects the risks the reserves are intended to cover. Moreover, in all the countries, the government is obligated to transfer capital to the central bank in the form of nonnegotiable securities if the value of the assets is less than the sum of its liabilities and capital. Therefore, in principle, the financial provisions in the selected central banks should in general be sufficient to ensure autonomy.

Monetary Instruments

In addition to conferring on the central bank the authority to conduct monetary policy, the law also usually includes a range of more or less specific monetary instruments that the central bank can use. The paradigm behind central bank autonomy presumes that the central bank does not direct credit within the financial system, because to do so would distort decision making about economic policies. Specific allocation of credit should be left to the financial sector, which would then determine the need for credit according to profitability criteria for the private sector and according to economic criteria for the government. However, in countries with less developed financial markets, the central bank may have to rely on more direct instruments during a transition period to affect the level of money in the banking system.

In addition to the right to set key short-term interest rates and to rediscount and conduct open market operations in a specific list of financial assets, several of the selected central bank laws have detailed provisions on indirect monetary instruments. Many of these instruments, such as restricting credit to specific sectors or limiting interest rates for certain depositors or borrowers, have quasi-fiscal elements.


When the state delegates authority to an autonomous central bank, the bank should be made accountable for how it uses that authority to conduct monetary policy and for how it administers the often significant amounts of public money. A precondition for monitoring the monetary policy performance of the central bank is that the objectives must be clearly defined, subject to ranking if there is more than one objective, and easy to monitor.

Most of the sub-Saharan African central banks are accountable for monetary policy to the minister of finance, who then forwards the annual report and the audited financial statements to the legislature. Sometimes the central banks forward copies directly to the legislature, which reduces the possibility of short-term government influence on the implementation of monetary policy. However, in a few cases the minister of finance (Namibia) or the council of ministers (Madagascar) must approve the format in which the report is published. This could reduce the credibility of monetary policy.

To facilitate performance monitoring, the central bank law should stipulate that transparent reports on monetary policy should be published. Frequent information on monetary policy can also make it more difficult for the government to intervene. Central bank laws generally require, at a minimum, an annual report on the operations of the central bank. However, an increasing number of countries, including Kenya, Tanzania, and Zambia, now require the central bank to present semiannual monetary policy statements. Some central bank laws stipulate, in addition, that minutes must be taken on the deliberations of the central bank board, but they often leave it to the board to decide on the manner of their publication. In practice, most central banks analyze and publish information about the economy in their bulletins.

Central banks control public money, and so sound business and financial practices are important to ensure central bank credibility. Lavish or unnecessary expenditures endanger credibility and, hence, autonomy. To ensure sound financial practice, the central bank must publish financial statements that are in accordance with international accounting standards, and when practice deviates from these standards, deviations should be fully disclosed. Many sub-Saharan African central bank laws are quiet about accounting standards while explicitly stipulating that “sound accounting principles” should be used and “proper books” kept. However, all the selected sub-Saharan African central banks are required to produce annual audited statements, and these statements must be supplemented by other, more frequent—if less rigorous—statements. For example, a summary balance sheet must be published in most of the selected countries, at a minimum, by the end of each month. Such documents further facilitate the monitoring of the central bank.

Most central bank laws require independent external auditors, but a few countries (for instance, Ghana and Uganda) use the auditor general. While it is reasonable that the minister of finance, or the person in charge of monitoring the central bank, have the right to make ad hoc investigations, it is important that independent, external, authorized auditors also be used to ensure full disclosure according to well-established accounting practices.

On the basis of the foregoing, it is evident that most sub-Saharan African countries recognize the importance of providing a favorable legal and regulatory framework for the efficient conduct of monetary policy and, ultimately, of ensuring price stability. It is also evident that most countries have made some progress in providing such an environment, although progress has been rather slow for many reasons. First, considerable inertia has been created because of tradition. Most sub-Saharan African central banks were established in the tradition of the Bank of England or the Bank of France, both of which, until quite recently, enjoyed only limited autonomy. Even with the trend toward liberalization of financial systems, sub-Saharan African governments and their central banks see little compelling reason to change; on the contrary, most of these governments believe it is in their interest to maintain the status quo. Second, the concept of an autonomous central bank and the role it plays in the development of the financial system have gained acceptance only within the last decade; it may take time for sub-Saharan African countries, which are only now making a break-through with financial sector reform, to embrace all the tenets of an autonomous central bank. Third, most sub-Saharan African governments are not as committed to structural reform of the economies as would be desirable for longer-term growth. Except for a few countries, even in those where central banking laws have been amended, structural reform has been initiated at the recommendation of the IMF and other similar partners and not because of a deep-seated desire in the country for reform. Fourth, and perhaps most important, progress toward central bank autonomy has been slow because of political considerations arising primarily out of governments' unmitigated desire to exert control—directly or indirectly—over central bank finances in order to fund government budget deficits.

Box 4.Main Recommendations on Central Bank Autonomy and Accountability

Objectives and targets. Price stability should be the preferred primary objective of monetary policy. Consistent with this broad objective, specific targets—which could involve direct inflation targets, maintenance of a fixed exchange rate, or monetary aggregate targets—should be established and published. These targets may be determined by the central bank (goal or target autonomy) or by the government in agreement with the central bank to be implemented autonomously by the central bank (instrument autonomy). To facilitate accountability, the targets should be easy to monitor.

Monetary policy. A central bank should be free to implement monetary policy to achieve its target. To this end, the bank should have authority to determine quantities and interest rates on its own transactions without interference from the government.

Conflict resolution. A clear and open process should be established to resolve any policy conflict between the central bank and the government. Some of the points below (for example, the nature of government representation on the board) are potential channels for such a resolution; another approach is to allow the government to direct or overrule the central bank, but such a power should be constrained to avoid other than exceptional use. It should be absolutely clear to the executive, the legislature, and the general public that responsibility for the results lies with the government, not the central bank, if the latter is overruled, its advice ignored, or its effectiveness significantly limited by government policies.

Governor. For balance, nomination and appointment/confirmation of the governor should be handled by separate bodies. The term should be longer than the election cycle of the body with the predominant role in selecting the governor. Dismissal should be only for misrepresentation of qualifications or misconduct; lack of performance could also be grounds if clearly defined in terms of the primary objective and specific targets. The latter could be ruled upon by a suitable and independent judicial process and perhaps be with the consent of the legislature.

Board. Composition of the board should ensure a reasonably well informed and balanced view, but should avoid conflicts of interest. Precisely what is reasonable depends in part on the role of the board (decision making, monitoring, or purely advisory) and whether it is a single or multiple board structure. The highest level board should include a majority of nonexecutive, nongovernment directors. Indeed, direct government representatives should be eliminated from a policy board and probably also from a monitoring board. If a government representative does participate in a policy board, it should at least be without the right to vote (though it might be with a limited, temporary veto power). As with the governor, nomination and appointment/confirmation should be by different bodies; terms should be longer than the election cycle of the main body in the appointment process and should be staggered; and dismissal of board members should occur only for breaches of qualification requirements and misconduct and on performance grounds only if clearly defined. The latter could be ruled upon by the supreme court or an independent tribunal and be with the other board members' prior consent.

Credit to government. If not prohibited, direct credit to the government should be carefully limited to what is consistent with monetary policy objectives and targets. For example, temporary advances and loans could be allowed if (1) they are explicitly limited to a small ratio of average recurrent revenue of preceding fiscal years (say, 5 percent); (2) they bear a market-related interest rate; and (3) they are securitized by negotiable securities. The central bank should not underwrite and participate as a buyer in the primary market for government securities, except with noncompetitive bids and within the overall limit for credit to government. Indirect credit to the government, or buying out-right existing government securities held by the market, or accepting them as collateral, should be guided by monetary policy objectives. The central bank should not finance quasi-fiscal activities.

Exchange rate policy. Basic consistency must be ensured between exchange rate and monetary policy. If exchange rate policy (including choice of regime) is not solely the responsibility of the central bank, the bank should nevertheless have sufficient authority to implement monetary policy within the constraint of exchange rate policy (for example, in a fixed-rate regime, to support the exchange rate as the specific target of monetary policy) and should be the principal advisor on exchange rate policy issues (for example, as to whether the current regime is most suitable for the fundamental price stability objective). In a conflict with the government on exchange rate issues, the conflict resolution procedures as above should come into effect.

Financial conditions. The law should ensure that the central bank has sufficient financial autonomy to support policy autonomy, but with matching financial accountability. Its budget should not be subject to normal annual appropriation procedures (but could be subject to a longer-term appropriation—for example, on a cycle consistent with the term of the governor). Only realized net profits, after prudent provisioning by the central bank and appropriate allocations to general reserves, should be returned to the government. The government should ensure the solvency of the central bank by transferring interest-bearing negotiable securities if the authorized capital is depleted. The body to which the central bank is accountable should be allowed to ask external auditors or the auditor general to review the central bank's accounts and procedures.

Areas for Further Reform

To attain a suitable level of central bank autonomy, therefore, governments need to promulgate legislation that contains, at a minimum, provisions that give explicit priority to price stability as the objective of monetary policy; give authority to the central bank to supervise the financial system; consolidate the licensing and revocation of licenses in one body, preferably the central bank; require an institutionalized, transparent mechanism for resolving divergences between fiscal policy and monetary policy; ensure that governors of central banks and members of boards of directors do not come under undue political influence; place explicit and reasonable limits on the amount of credit that the central bank can grant to the government; require such credits to be collateralized by income-yielding assets bearing market-determined rates; protect the central bank from the obligation to undertake quasi-fiscal activities; and ensure the financial viability of the central bank. (See Box 4 for a detailed description of required reforms in central bank autonomy and accountability.)

A well-conceived legislation, however, represents only a minimum condition for central bank autonomy. A sufficient condition would be commitment by governments to ensure compliance with the provisions of the legislation. In this regard, it would be necessary to set up independent, specialized courts that deal only with matters relating to the financial sector. This is not only likely to speed up the settlement of financial contractual cases, but will, above all, send a clear signal regarding the direction and intention of financial policies.

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