SYDNEY and DAKAR, November 1 (IPS) – Developing countries have long been told to avoid borrowing from central banks (CBs) to finance government spending. Many have even legislated against CB funding fiscal spending.
Central bank finance
Such laws are said to be necessary to curb inflation – below 5%, if not 2% – to accelerate growth. These agreements have also limited the potential development role of CBs and the government’s ability to better respond to crises.
Improved fiscal-monetary policy coordination is also needed to achieve the desired structural transformation, especially in decarbonizing economies. But too many developing countries have tied their own hands with restrictive laws.
Some have pragmatically suspended or circumvented such self-imposed bans. This allows them to borrow from the CB to finance pandemic relief and recovery packages.
Such recent changes have reopened debates about the urgent need for cyclical and developmentally coordinated fiscal-monetary policy.
Financial resources destroyed
But the financial interests argue that this allows national CBs to finance government deficits, i.e. monetary funding (MF). Normal MF blamed to create conditions for public debt, balance of payments deficit and inflation to rise.
Like William Easterly notes, “Fiscal deficits are largely blamed for the kinds of economic ills that plagued developing countries in the 1980s: excessive indebtedness and debt crises, high inflation, investment efficiency and poor growth”.
As a result, appeals to MF are often met with skepticism, if not outright opposition. MF undermines central bank independence (CBI) – hence the strict separation of currencies from financial authorities – believed to be necessary to prevent runaway inflation.
A recent study by the International Monetary Fund (IMF) asserts that MF “involves significant risk“. But it admits MF to deal with the pandemic no danger stable price. An article by the Bank for International Settlements also shows that MF be activated developing countries to respond to the pandemic.
The cases of MF leading to runaway inflation are very special, for example Bolivia in the 1980s or Zimbabwe in 2007-08. These often involve the breakdown of political and economic systems, as when the Soviet Union collapsed.
Bolivia suffered great external shocks. These included Volcker’s interest rate spike in the early 1980s, reduced access to international capital markets, and falling commodity prices. Political and economic conflicts in Bolivian society was hardly helped.
Similarly, Zimbabwe’s hyperinflation is partly due to conflict over land rightsmade worse by the government’s mismanagement of the economy and the British-led Western efforts to undermine the Mugabe government.
Indian Lessons
Former Governor of Reserve Bank of India YV Reddy note that fiscal-monetary coordination has “provided capital for development of industry, agriculture, housing, etc. through development financial institutions” in addition to allowing state-owned enterprises (SOEs). ) loans in the early decades.
For him, less favorable outcomes – for example, continued “macro imbalances” and “automated monetary deficits” – are not due to “normal fiscal initiative but to limited financial resources.” soft budgets” of SOEs, and “not sustained enough returns” from public investment.
Monetary policy is constrained by large and persistent fiscal deficits. For Reddy, “certainly the nature of the interaction depends on the particular situation of each country”.
Reddy called for addressing fiscal-monetary policy coordination issues within a broad general macroeconomic framework. Several lessons can be drawn from the Indian experience.
First, “there is no ideal fiscal deficit, and the key factors are: How is it financed and what is it used for?” There is no substitute for the efficiency of SOEs and the financial viability of public investment projects.
Second, “the management of public debt, in countries like India, plays an important role in the development of domestic financial markets and therefore for the implementation of monetary policy, especially is for effective transmission”.
Third, “the harmonized implementation of policies may require one policy not to burden the other for too long”.
Lessons from China?
Zhou Xiaochuanthen Governor of the People’s Bank of China (PBoC), emphasized the responsibilities of CBs – including the development and stability of the financial sector – in developing and transition economies.
The head of China’s CB noted, “monetary policy will certainly be affected by the balance of international payments and capital flows”. Therefore, “financial regulation and macroprudential are sensitive tasks” for CB.
The PBoC’s goals – long mandated by the Chinese government – include maintaining price stability, boosting economic growth, boosting employment and solving balance of payments problems.
Many of the goals require more coordination and joint efforts with other government agencies and regulators. Therefore, “the PBoC… works closely with other government agencies”.
“Striking the right balance between the multiple objectives and the effectiveness of monetary policy is difficult,” Zhou admits. By maintaining close ties with the government, the PBoC has facilitated the necessary reforms.
He also stressed the need for policy flexibility where appropriate. “If the central bank had only emphasized keeping inflation low and not tolerating price changes during the price reform process, it could have halted the overall reform and transformation process.” .
During the pandemic, the PBoC has developed “structural currency“Policy tools, targeted to help sectors affected by Covid. Structural tools help keep interbank liquidity plentiful and support credit growth.
More importantly, it targeted monetary policy tools increasingly aligned with the government’s long-term strategic goals. These include supporting desirable investments, for example, in renewable energy, while also preventing asset price bubbles and ‘overheating’.
In other words, PBoC coordinates monetary policy with fiscal and industrial policies to achieve the desired steady growth, thus boosting market confidence. As a result, inflation in China remains lower.
Consumer price inflation has averaged only 2.3% over the past 20 years, according to The Economist. Unlike the global trend, consumer price inflation fell to 2.5% in August and only increased to 2.8% in Septemberdespite the ‘zero-Covid’ policy and measures like lockdown.
Necessary reform
Effective fiscal-monetary policy coordination requires appropriate arrangements. One IMF Working Papers found that “the legal independence of the central bank or the balanced budget provision or the rules-based monetary policy framework… are not sufficient to ensure coordination of fiscal and monetary policy.” effective”.
The appropriate institutional and operational arrangements will depend on the specific circumstances of each country, for example, the level of development and depth of the financial sector, as both Reddy and Zhou have noted.
As the financial sector dries up and countries need dynamic structural transformation, the establishment of independent monetary and financial institutions is likely to hinder or improve stability and sustainable development.
A clear understanding of each other’s objectives and operational processes is critical to establishing effective coordination mechanisms – at both the policy formulation and implementation levels. Such an approach should achieve the better coordination and complementarity needed to mutually reinforce monetary and fiscal policies.
Consistent Macroeconomics policies must support the necessary structural transformation. Without effective coordination between macroeconomic policies and sector strategies, microfinance can exacerbate imbalances of payments and inflation. Macroprudential regulations also need to avoid negative effects of MF on exchange rates and capital flows.
Poorly accountable governments often take advantage of real, exaggerated, and imagined crises to pursue macroeconomic policies for the survival of the regime, and to the benefit of those close friends and financial supporters.
There is no doubt much better governance, transparency and accountability are needed to mitigate the immediate and long-term harm caused by the ‘leakage’ and abuses associated with increased borrowing and spending by the public. government.
Citizens and their political representatives must develop more effective means of ‘discipline’ policy making and implementation. This is necessary to ensure public support to create fiscal space for cyclical spending and responsible growth.
IPS UN Office
By @IPSNewsUNBureau
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© Inter Press Service (2022) – All rights reservedOrigin: Inter Press Service
