NEWSMAKERS
Avast Invaders!
Newsmakers reports from the war zone...
All hands are on deck
as central banks take stock of the escalating crisis in Iraq. At a guess,
the most twitchy of all might be Iraq’s own central bank, whose very livelihood
is on the line as events draw menacingly closer to what seems to be their
inexorable conclusion. The governor of the central bank, Issam Rashid
Hwaish, has poured vitriol on the announcement that overseas assets held
by the central bank (as well as other government funds) are to be seized
and transferred to the New York Federal Reserve. He has denounced this
as an “act of piracy”, as “these deposits enjoy the protection of the
party that decided to freeze them” - in other words the UN Security Council
which did so back in 1990. Hwaish says that therefore “US authorities
are committing a new stupidity by violating international law.”
But this is not all Hwaish has to worry about. Washington has long been
plotting the replacement for Saddam Hussein’s regime, and that does not
exclude plans for rebuilding the central bank as well as possibly issuing
a new currency in postwar Iraq. It has been conjectured that the dollar
may become the de facto currency, though some have suggested that perhaps
the currency used by the Kurds in northern Iraq, the “Swiss print” dinar,
might replace the dinar which is in circulation in the rest of the country.
“Whatever it is, it will not be a currency with Saddam Hussein’s picture
on it,” according to one senior US official.
What’s more, it will presumably not be up to the central bank. But by
all accounts, the Iraqi central bank doesn’t have much say in such matters
anyway. According to dissident former governor of the 1970s Salah Al-Sheikhly,
who is now one of the lynchpins of the opposition movement against Saddam,
“the central bank no longer performs its institutional role in the economy...
It doesn't regulate exchange rates or interest rates; these decisions
are controlled by the regime. In reality, Saddam and his sons control
the printing presses and they are just manufacturing more money.” No surprises
there. A political exile based in London and no friend of Saddam, Al-Sheikhly
says Saddam has done for the Iraqi economy by racking up prodigious debts
with unfettered military spending - to the tune of $112 billion according
to his estimates. “It is with governments like Russia, France and Bulgaria
for the supply of arms,” he has said. Along with other economists, he
has been working with the US State Department and Treasury to come up
with an economic plan for postwar Iraq, favouring a scenario such as took
place in former Yugoslavia where 66% of its debts were forgiven.
Iran - Nourbakhsh
Dies
Neighbouring Iran’s
central bank has experienced trouble of a different kind. Sadly, the governor
died prematurely of a heart attack last weekend at the age of 54. Mohsen
Nourbakhsh was hurried to hospital in northern Iran where he was presumed
to have been on holiday for the Iranian new year. For the time being,
the deputy governor of the central bank, Mohammad Javad Vahhaji, has taken
over as the interim governor, until a new governor is appointed.
Nourbakhsh, an accomplished American-educated economist, began his second
innings as governor in 1994, having been governor in the mid-eighties
before transferring to the government where he was finance minister for
six years. But on returning to the central bank his relations with the
finance ministry soured as he was constantly at loggerheads with the finance
minister, Tahmaseb Mazaheri, who stood in the way of Nourbakhsh’s attempts
to raise interest rates. Disagreements reached a stage where recently
it was rumoured that certain members of parliament were plotting his removal.
He is said to have “strictly controlled Iran's banking and monetary system”
according to one Iranian economist, and the loss of Nourbakhsh is said
to have significant implications for Iranian economic policy - under Nourbakhsh
the central bank was said to be almost like a rival ministry, with a great
deal of influence over major economic policies.
Nourbakhsh played a pivotal part in the rehabilitation of the obliterated
Iranian economy in the aftermath of the devastating war with Iraq during
the 1980s. President Mohammad Khatami, with whom Nourbakhsh was said to
be close, described him as a “very sincere, intelligent and capable serviceman”,
while the council of ministers said he had played a “key role in putting
shape into the monetary policies of the country by unifying the Iranian
currency and establishing a reserve fund [for the surplus oil revenues]
as well as [helping with the] eye-catching rise of the central bank's
reserves.” The IMF put a good word in for Nourbakhsh too. Its top gun,
Horst Kohler, said, “Nourbakhsh will be remembered as a person who played
a key role in Iran’s economic development and promotion of transparency
in decision-making of that country.” A tribute to Nourbakhsh from the
central bank website: http://www.cbi.ir/nourbakhsh/MASJED-NOURBAKHSH.MP3
Other central banks in the region have reacted with admirable equanimity in the face of the crisis in Iraq. Central banks are notorious for denying anything is amiss when plainly it is - defending pegs when devaluations loom is a prime example - but this may not be the case right now.
In Turkey, the central bank is taking things in its stride. The vice-governor of the central bank, Professor Fatih Ozatay, reminded Newsmakers that “the central bank has a lot of experience from the Gulf war of 1991” and it was well aware that “financial stability is a must”. Although he cautioned that the main thing is that fiscal policy “should be further tightened”, he said the central bank is fully prepared for every eventuality: “As the central bank, we are targeting inflation and our main aim is price stability, but since there is a war, financial stability takes the first priority.” Ozatay also pointed out that “the smooth functioning of the foreign exchange market during the war is important”; consequently measures have been taken to meet additional demand for foreign exchange and the central bank stands ready to intervene if necessary.
Stiff Upper
Lip In Russia
Sergey Ignatyev,
the governor of Russia’s central bank, breezily reassured President Putin
that there was nothing to worry about: “Our currency reserves enable us
to prevent any significant rouble rate fluctuations in the near future.
As for long-term prospects, it would be premature to talk about possible
consequences but I think they will be insignificant.”
...And Kazakhstan...
Meanwhile the governor of the central bank in Kazakhstan, Grigori Marchenko,
tells Newsmakers that, bar a “terrible ecological disaster”, the war is
only a concern insofar as it will affect oil prices, oil being the cornerstone
of Kazakhstan’s burgeoning economy. But as long as prices remain between
$20 and $30 a barrel, Marchenko says that Kazakhstan would not be affected,
and he prefers to remain optimistic.
...And Georgia...
Similarly in Georgia, which does not have large oil reserves, the central
bank tells Newsmakers that the war is having “no impact on the banking
system”, although it understandably hopes that it will be over as soon
as possible.
...And Lebanon?
The governor of the Lebanese central bank, Riad Salamé, has announced
that “Lebanon has sufficient defences to face the negative effects of
a war on Iraq, which are mainly higher energy prices and a disruption
in exports to Iraq.” Of course, he observed, the bank’s ability to cope
would ultimately “depend on the duration of military operations and their
impact on the economies of Gulf countries.”
Ben Bernanke, the tidy-bearded maverick Fed governor, has taken no time to find his feet at the Fed, though some may question whether he is punching above his weight. Amongst his first acts as a governor was to take it upon himself to apologise, on the Fed's behalf, for causing the Great Depression in front of the great monetarist icon Milton Friedman himself. That small matter out of the way, he then saw fit to dispel any fears of deflation, by unveiling a newfangled device, the printing press, as the “secret weapon” and reminding every one of the central bank's hyperinflationary potential. Not content with this, he now has initiated a full and frank discussion of how the US monetary policy regime should function with his fellow governors - not all of whom share his opinions - arguing that explicit inflation targeting might not be such a bad thing.
At almost exactly the same time, Donald Kohn, who also sits on the board of governors, gave a speech apparently in direct contradiction to Bernanke’s, declaring his doubts as to the desirability of implementing an inflation-targeting regime. All this as the US goes to war, with Greenspan's future uncertain, oh and an enormous fiscal deficit on the way. While Bernanke is to be commended for his openness, Newsmakers can’t help wondering what Alan Greenspan makes of all this. Has he reminded the professor that the Fed is not a study group, and that solidarity, rather than one's economic reform agenda, should be the order of the day? Has he asked him to read a recent paper from the BIS? This suggests that too much transparency from a central bank may not be altogether a good thing: should the Fed close the discount window on Governor Bernanke's open-mouth operations?
Israel’s finance ministry keeps on picking on its central bank. Most recently the finance ministry has made the central bank its scapegoat for Israel’s economic sorrows when it published a report excusing itself for the economy’s below par performance. It may not come as a surprise to some that it has charmingly blamed much of this on the central bank’s “too restrictive”, “unresponsive” and even, in a brilliant use of language, “anaemic” monetary policy. It made a transparent dig at the central bank governor, David Klein, when it bare-facedly stated that “Bank of Israel policy differs from that of other central banks, which adapt to the real situation of the economy.” The shameless report even went as far as to say that, far from correcting any imbalances, the central bank had actually “hindered the process of economic recovery to a large degree.”
All this may go some way to explaining why the government thinks that it is paying its central bankers too much. Palpably traumatised by what some of the central bankers are being paid, the treasury's wage director has ordered its enforcement unit to investigate the legality of these salaries. The leader of this enforcement unit has concluded that “what is going on at the Bank of Israel is shocking... Its workers are earning salaries that are out of all proportion.” For its part, the Bank of Israel has observed that “the wages of the bank's employees are set in accordance with both the collective agreements for the civil service and the law, for whose enforcement the wage director is responsible.” What is more, since 1987, the number of staff at the central bank has shrunk from 1,225 to 850 - a 30% reduction, which saves the taxpayer tens of millions of shekels annually.
The IMF has sent reinforcement by recommending full independence for the besieged institution. A new Bank of Israel law would protect the governor of the Bank of Israel from being fired over policy differences and should also stipulate price stability as the sole objective of monetary policy, thus abolishing the exchange rate fluctuation band. http://www.imf.org/external/country/ISR/index.htm
Newsmakers’ heartfelt pity goes out to the many central banks whose ability to operate effectively is being cruelly hampered by meddlesome and mischievous governments. Israel is far from being the only case in point. Central bankers in Poland are aghast at prime minister Leszek Miller’s most recent blasé announcement that he might abolish its monetary policy council. Not content with the central bank’s monetary policy, which is rather too tight for his liking, and perhaps not sufficiently politically expedient, Miller struck on this amazingly original solution to his conundrum. But with any luck Poland will squeeze into the euro zone before Miller gets his eccentric way.
Then there is Venezuela. Former central bankers are so scandalised about the state to which the central bank has been reduced by the country’s populist president Hugo Chávez that they have described it as “a monetary branch of the government.” Eleven former senior executives have signed a document alleging that the central bank is breaking its constitution by endorsing government policies: “Monetary policy is now subordinate to fiscal needs and this has led to non-compliance with the constitution.” They cite three ignoble episodes as proof of this: in August 2000 when the finance minister “decided to confiscate” a generous quantity of central bank capital; in October 2001 when the central bank law was fiddled to deny the central bank the ability to establish its reserves; and in November 2002 when its law was further perverted to allow the Treasury to liberate what it must have considered to be excess funds from the bank.
But this pales into insignificance in comparison to Zimbabwe’s central bank, which may be the least independent in the world. Lovemore Kadenge, the president of the Zimbabwe Economic Society, insists that the government is able to help itself to central bank money to its heart’s desire. Lucky it. Or not, depending on which way you look at it, when one considers that in the long run, the consequences are disastrous. Who was it who said that in the long term we are all dead?
In fact, Newsmakers was recently fortunate enough to get some first hand experience of the rocky relationships that so often exist between finance ministries and central banks. At an exclusive dinner party in Istanbul replete with central bankers and finance ministers from the Caspian region, Newsmakers, perhaps unwisely in retrospect, elected to sit next to a befriended central banker - without taking the care to check who else was supposed to be sitting at a table with limited seats. It had been reserved for the delegation from the country of the central banker in question, and Newsmakers had sat in the seat intended for the finance minister. The latter was of course deeply offended when it transpired that there were not enough seats for him and his henchman to sit together and stormed off in a huff, bad-mouthing the central banker who had been noble enough to endure our presence. One more rift between central banker and finance ministry, as if there weren’t enough already. Are they all caused by such trifles?
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