Governors of Central Banks Mull Development Mandate

7 March 2014
press release

Abuja — The acting Governor of the Central Bank of Nigeria, Sarah Alade hosted a caucus of African Central Bank Governors on Thursday, in the margins of the joint ECA-AU ongoing Conference of African Ministers of Finance, Planning and Economic Development on the theme: "Industrialization for inclusiveness and Transformative Development in Africa"

Speaking at the conference, the Economic Commission for Africa, Executive Secretary, Carlos Lopes told the governors that rapid innovations in financial services offer exciting opportunities for monetary policy to play a role in promoting inclusive industrial development. He stressed, however, that monetary policy must be consistent with Africa's structural transformation agenda.

"In some situations this may require trade-offs between the central banks' core mandate of price stability and the objective of financial access and economic stimulus for industrial development," he said.

The meeting learnt that the global financial crisis has brought about the need for synthesizing the traditional role of central bank with development functions. In the discussions a major area of tension was the question of rethinking the mandate of African central banks and whether the focus of their mandates should remain on price and financial stability or broadened to include measures that promote the development of economy in key areas such as industrialization. Core to the debate was the importance of remaining independent from influence from political influence in the interest of financial stability. Lopes argued for a balance between economic stimulus and financial stability.

"One starting point could be to look into positive examples of financial inclusion in developing and emerging economies," he said.

He offered numerous examples in Africa and other emerging economies where mobile banking and access to debit and credit facilities have had a far reaching impact on the unbanked and on those living in rural areas.

"Driving this new focus is the recognition of the critical role of central banks in strengthening financial stability and economic activity, the emergence of digital financial services and the need to promote responsible financial services. Collectively these developments have contributed to the evolution of 'new mandates' of central banks," he said.

He proposed five areas for the governors to consider.

First, central banks should pay attention to the rural-micro financial markets to enhance financial intermediation and help address disparities in rural urban incomes and development.

Second, said, Lopes, the experiences of China show that exchange rate management can be used to influence competitiveness of goods and services on international markets.

"In this context, managing exchange rate volatility including those arising from commodity price increases and portfolio investments is an issue of importance for central banks," he added.

Thirdly, he proposed the need to strengthen financial intermediation for domestic resource mobilization as another way for central banks to support the much-needed finances for industrialization.

Fourthly, in view of the proliferation of informal financial institutions or "shadow banks" in many African countries, he proposed that central banks should find ways and means of bringing them under formal regulation and supervision, while at the same time providing support for their effective and efficient operation.

Lastly, said the ECA Chief, central banks must ensure more productive use of Africa's reserves.

"It is troubling that unlike other developing regions of the world, African countries hold in aggregate more deposits in Bank for International Settlements (BIS) reporting banks than they receive in loans from them - a trend that he said suggests that the bulk of revenues from exports of African oil and commodities are not intermediated by local banks.

"The revenues remain in overseas banks which recycle about 60% of these deposits as cross-border loans back to African banks and the non-bank sector. I am sure many of you will agree that this situation is totally unacceptable," he stressed.

He also called for a discussion on how reserves can be considered by the IMF, while making them work for Africa's development and not just through deposits in developing countries' financial vehicles.

"Central banks can play a critical role in promoting the establishment and sustainability of regional capital markets through harmonization and coordination across countries and providing well-resourced regulatory instruments and agencies that can encourage the growth and integrity of financial institutions and limit money laundering," he underlined.

This trend suggests that the bulk of revenues from exports of African oil and commodities are not intermediated by local banks. Instead, they remain in overseas banks, which recycle about 60% of these deposits as cross-border loans back to African banks and the non-bank sector. I am sure many of you will agree that this situation is totally unacceptable. We also need to enter into a discussion on how reserves can be considered by the IMF, while making them work for Africa's development and not just through deposits in developing countries' financial vehicles.

Finally, central banks can play a critical role in promoting the establishment and sustainability of regional capital markets through harmonization and coordination across countries and providing well-resourced regulatory instruments and agencies that can encourage the growth and integrity of financial institutions and limit money laundering.

The Caucus of African Governors of Central Banks is the first to take place in the context of the joint Conference.

For her part, the acting governor said that although focus on price and financial stability had served the region well, it had not brought down unemployment or achieved inclusive growth for the region. She called on the governors to work together towards solving the continent's challenges, stressing that development must be part of the agenda of the central banks on the continent.

Representing the African Union Chairperson, Nkosazana Dlamini Zuma, Mr. Anthony Maruping, Commissioner for Economic Affairs urged Africa central bank to ensure effective collaboration with fiscal authorities to drive inclusive growth.

Jointly issued by ECA and AUC

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