Central Banking Law
The central bank law should provide for the establishment, organization, powers, and duties of the central bank, with a clear definition of its ultimate objectives, and should grant the central bank autonomy to implement monetary policy. The primary objective of a central bank is usually to ensure price stability, as well as sound banking and payment systems. The law must also provide the central bank with the necessary instruments and powers to enable it to achieve its objectives. Extraneous powers and duties are to be avoided, and the bank ought to be protected from outside interference in its operations and be assured of full operational autonomy.
The law should also stipulate the role of the central bank and that of the government in determining foreign exchange policy, for example, who decides on the country’s exchange regime, who determines the exchange rate, and who is responsible for foreign exchange operations and reserves management. The responsibilities of the central bank in matters such as exchange control and the management of international reserves need to be clear.
Coordination between the central bank and the Ministry of Finance should be provided for in the law. In addition to the bank’s duty to act as the fiscal agent of the government, the law would strive to provide the government with a risk-free depository, with a mechanism for consultation and coordination in the formulation of a country’s macroeconomic policies, and with assistance in defining the institutional relationship between monetary and fiscal operations.
Modern central bank laws limit central bank credit to government and do not permit the central bank to perform non-central banking functions. For proper accountability and to protect the ability of the central bank to achieve its monetary policy mandate, developmental and other social policy objectives should be financed through the government’s budget. The law should also place limits on government lending and should make transparent the conditions when that type of lending is permitted.
While the law should grant appropriate operational independence to a central bank, it must also specify the arrangements for its accountability and assurances of integrity. The arrangements include those for internal auditing, auditing and publishing its accounts, providing public information services, and making available central bank officials to report to designated public authority on the conduct of monetary policy and on its performance in achieving its objectives.1
