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Badilisha Lugha KISWAHILI

Governor Ndulu and statutory independence of the Bank of

2nd February 2013
Central bank governor, Prof. Benno Ndulu

How independent is the central bank from decision makers at the Ministry of Finance or the presidency, and do we already have sufficient autonomy of the central bank or more is needed? Central bank governor Prof. Benno Ndulu seemed to have had clear cut answers in that direction, that there is need for full statutory independence of the central bank from the 'politicians,' for the reason that it has a delicate service to offer, maintaining the health of the national economy. Is it this facility that the economy needs, or might it also need some central bank overhaul?

As the issue came up in contributing to the Constitutional Review Commission, it is evident that the governor looked at the issue from what could be taken as 'best practices' either in all western countries, or at least among a number of them. It is hard to say if any central bank around the world is really independent, and if they believe they are, if they are independent in the same sense, for instance if the Bank of France is independent in the same sense as the Federal Reserve Board in the United States. The latter seems as the right model Prof. Ndulu was thinking about.
Were that to be taken as the model, an auxiliary question would follow, as to what is the link between the US economic model and its central bank, and what hence does that model differ from others? Would the eurozone for instance differ with the US in terms of economic structures and policies, but maintain exactly the same format of how to organise and run the central bank? And why is there contention on the EU central bank role in solving the crisis in southern Europe in particular - as on the basis of the formulation by Prof. Ndulu, is it just politicians interfering?
What is not stated in the presentation by Prof. Ndulu is what is the right or proper role of the central bank in a country like Tanzania, either as it is or as it aspires to merge with the rest of the EAC area into an extended economic area. Presumably, though these questions were answered earlier, in reconstituting the central bank in 1992 in particular, were privatisation also came up in earnest. For one thing, no real debate came up in relation to the central bank but restructuring the National Bank of Commerce; the central bank was plainly not in a position to carry it out.
As the need arises, it would be helpful for Prof. Ndulu and kindred professionals to realize that the dispute on reforming the NBC shows that the central bank has quite a limited role in how economic stability is maintained. None of the major changes or institutional overhauling from the early years of the 1990s depended on the way the Bank of Tanzania saw things, as it was itself just another economic reform project of the World Bank (the core aspect of financial sector restructuring). Real economic restructuring was conducted between the IMF and the World Bank, and in association with the donor community, as plenty of aid was attached to reform.
To find out the difference between the role of the central bank as an instrument of policy makers and as an autonomous institution charged with maintaining proper levers of economic policy, perhaps a comparison of first phase and current roles of the Bank of Tanzania may help. At that time the government used the central bank to obtain the sort of local financing it required to put into economic institutions and social services, by inflating goods and services (or properly speaking, by hard rationing by means of inflation). The shortages that resulted crippled all economic activity, hence the reform process of the 1990s was meant to eliminate such risks.
Even with reform, it is often difficult to distinguish between central bank activity and Treasury policies as such, for instance when TANESCO was seeking close to Tsh0.5trillion in guaranteed loans, when Mustafa Mkulo was minister. This appeal failed and contributed to his departure as parastatal lobbies in Parliament sought to discredit the minister in various ways, and when Dr William Mgimwa came in, he signed for around Tsh105billion in loan guarantees. In 2007 ex-Finance Minister Zakia Meghji organized a Tsh300bn corporate loan for TANESCO, and this did not seem to be the work of the central bank, save being the 'secretariat' of the loan.
At some point in the past, minister Mkulo was actively looking for a sovereign bond issue of some Tsh0.5trillion which now seems to be back in the saddle, and the IMF was lately heard to say that the country's credit position is sound and it can go on borrowing. Local economists added to that view, repeating the wisdom that the money should be used for infrastructure, so that it can be repaid, which is management rubbish, as it is negative to borrow short term commercial money to finance long term economic activity without a direct link with the loan. Still this wasn't surprising from the IMF or local economists, as big institutional interests.
In other words the country will not do better economically or worse because of the level of independence of the central bank but the soundness of government policies - and that is the essence of economic management worldwide. Even the cherished independence of the Bank of England or the Federal Reserve is finally an upshot of the specific economic structures underlining the two institutions, where in that sense independence is often merely in setting bank borrowing rates, which helps to dynamise commercial bank lending, or pull in money. The central bank keeps the balance between sagging stock exchange shares and booming property prices or vice-versa, but it cannot create either a good stock exchange or a property market.
In the case of Tanzania the central bank is living in seventh heaven enjoying its cherished interest rates independence to mitigate inflation by raising the cost of borrowing, enabling a semblance of stability in an economy where too many are already on the brink. Chances that Prof. Ndulu recalls days when women could issue khangas and other clothing on loan to those living around them and were sure to be paid at the end of the month without shouting at anyone are minimal, as policy shifted from 1996 onwards to collection of taxes, gradually squeezing the informal sector to oblivion. In 2006 physical crushing of stalls finished the rest.
While in the 1990s when reform was starting Tanzania's shilling was about 10 to the Kenyan shilling, and it should have maintained its value vis a vis the Kenyan shilling since both are now market economies, it has slid to 20 to the Kenyan shilling already, which means the core weaknesses of the earlier period continue. Is this due to lack of central bank independence or it is inability to reform key economic structures, and thus attract foreign exchange into the economy? It is not in memory that the Bank of Tanzania ever reminded the government that there is reform work to do, and ex-minister Mkulo was isolated in trying to talk about that. 
Prof. Ndulu has not helped the government to rationalize economic activity in the country and in that manner there are signs that we may enter into fully fledged resource curse situations. For instance all sectors of society (or rather bureaucracy) are waiting for gas manna from the southern regions, and since the residents in the areas weren't separated from the natural resource by proper payment for the value of their farms, a communal solidarity arises about the gas, which risks spreading to gold or national parks, if the government gives in to demands. And if TPDC takes the gas and gives it to TANESCO, the latter will pay nothing, placing government expectations on balance, and potentially wrecking institutions probing corruption.
There is an old expression about an emperor who slept while Rome burnt, not aware as to what was taking place and perhaps having issued strict orders not to be woken up, whatever the reason. While all is not lost yet, there are too many signs that the country is beginning to learn the bad habits of our African brethren either in terms of religious or tribal divisions, and where contentions for the presidency become a matter of all out war, whereas in past years we managed to conduct things quite well. One reason is the sort of dialogue of the deaf that the BoT has helped to maintain since the fourth phase administration (and Prof. Ndulu) came into office (in 2008), where government talks about infrastrastructure while the people talk about food; seven per cent growth rates are held as salutary and fully commendable, but Prof. Ndulu should know that 7% growth doesn't touch poverty.
Since the first phase administration the central bank hasn't helped the country to realize that the formulation by Mwalimu Nyerere that in order to develop we need 'people, land, good policies and good leadership' is unhelpful, as it makes land just a place where economic activity is conducted. This has remained largely the case, and colleagues of Prof. Ndulu like ex-UN staffer Dr Peter Temu fully maintain that position, that land doesn't need to be private property (for economic growth to be propelled) as "if an investor needs land he will be given." Meanwhile, contentions on land are rising all over the country, instead of proper sale of land via private or individual transactions, which would then attract bank credit, facilitate industrial projects and provide jobs and market for goods - if BoT knew land is key to value. In that case it isn't BoT independence which lets down the economy, but socialist values underlining the economy, and BoT professionalism unaware of the dangers.


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