Bankers'  Conference 2000

1. Preface and Overview 

1.1 Preface

 On October 6, 2000, the Banker’s conference was held in Windhoek to deliberate on the “Challenges of Monetary Policy for Namibia within the Context of the Common Monetary Area (CMA) Arrangement”. The objective of the conference was to exchange views on monetary policy options available to small open economies in general and Namibia in particular taking into account the CMA arrangement. The conference was the second of a series that started in 1999 aimed at providing a forum for the exchanging of views on economic policy in general and monetary policy in particular. It is the stated aim of the Bank of Namibia to organise this type of conference on annual basis.

Three imminent speakers were invited to address the conference. These were Dr. K. Jefferis, Deputy Governor of the Bank of Botswana, Mr. Steven Xu from Hong Kong, and Mr. Brian Kahn from the South African Reserve Bank. Their papers are published herein.

 The discussion centered around the main issues. The first dealt with the role of monetary policy in macroeconomic management with special reference to objectives, goals and instruments. Particular reference was placed on the experience of Botswana. The second issue looked at some strategies and issues in monetary policy with reference to the experience of Hong Kong. The last issue discussed was the monetary policy within the CMA Arrangement.

1.2 Overview and Reflections

 In his opening address, Mr. T. Alweendo, Governor of the Bank of Namibia highlighted immense challenges for monetary policy in small open economies. In the case of Namibia, these challenges include the limited scope for a discretionary monetary policy owing to the CMA membership. However, Governor Alweendo reiterated his standpoint that it was in Namibia’s long-term interest to remain CMA. He singled out a number of benefits, such as providing price stability, constraining monetary expansion, restraining excessive government spending and sending out credible signals about prospects for inflation. On regional integration issues, Mr. Alweendo argued that Namibia and the other smaller CMA countries would benefit greatly through enhanced closer co-ordination of monetary and economic policies. CMA would thus be better placed to serve as springboard for monetary integration at the SADC level.

In his presentation, Mr. K.R. Jefferis provided an overview of the general evolution of monetary policy in recent years, focusing on objectives, targets and instruments. It has now become widely accepted that the overriding objective of monetary policy should be low inflation or price stability. The prioritisation of the price stability objective has been accompanied by moves to strengthen central bank independence in the implementation of monetary policy. However, there remains considerable variation as to the choice of operational or intermediate targets that guide the implementation of monetary policy. He argued that the choice of an appropriate intermediate target depends on many factors, including the type of economic relationships and institutions that exist in a country, size of openness of an economy, the quality of information and knowledge about the monetary transmission mechanism, as well as prevailing economic thinking.

 On the conduct of monetary policy in Botswana, Mr. Jefferis noted that since the country left the Rand Monetary Area in 1976, it has pursued an independent monetary policy whose main objectives are to achieve low inflation and a stable and competitive exchange rate. Essentially this policy consists of a mixture of exchange rate and monetary targets. Such policy has to a large extent been successful in achieving a lower rate of inflation from 16.1 percent in 1992 to 6.5 percent in 1997. However, inflation has been low in 1997 due to increased government expenditure, which points to the needs for co-ordination between fiscal and monetary policy

 In his paper, Mr. Steven Xu focused on the strategies and issues in monetary policy from the Hong Kong experience. Mr. Xu noted that Hong Kong has tied its dollar more closely to the U.S currency, which in effect amounts to a partially dollarisation. This was done not only to ensure financial stability and investors’ confidence, but most importantly to limit and control speculation and attack on the Hong Kong Dollar, which has been prevalent in the past. The other reason was the hand over of Hong Kong to China, which brought about the question of credibility of Hong Kong as a financial Center and the ability of the monetary authority to pursue an independent monetary stance.

 The last presentation focused on the monetary policy within the CMA arrangement. Brian Kahn observed that the scope for discretionary monetary for Namibia, Lesotho and Swaziland (LNS) has been severely constrained by the nature of the CMA Arrangement. This is so despite the fact that there has been a slight shift from pure currency boards to the present situation where LNS have introduced their own currencies. Mr. Kahn also noted recent changes in South Africa’s monetary policy, mostly the introduction of inflation targeting. This has made the primary objective of monetary policy in South Africa explicit and has implications on the LNS countries. This also means that the LNS countries would have to adjust to shocks that are specific to South Africa and those that apply to some or all of the LNS countries may not be factored into policy.

 The above concern raises what is probably a central issue for the LNS—the issue of consultation. The existing agreement does not oblige South Africa to include CMA partners in the monetary policy decision making process. Mr. Kahn, however, noted that there were new developments for informal consultation, and these may further provide more focused policy input from the CMA perspective.