Harare - Central banks have traditionally prioritized price stability and controlling inflation. However, in recent decades, an increasing number of central banks have adopted formal dual mandates incorporating employment or growth objectives alongside inflation targeting. This reflects a growing consensus that central banks play a crucial role not just in maintaining macroeconomic stability, but also in fostering inclusive growth.
Against this backdrop, it is pertinent for the Bank of Namibia (BoN) to evaluate whether formally expanding its mandate to target maximum employment alongside price stability would enable it to more effectively address Namibia's pressing developmental challenges. This article aims to analyze the case for the BoN embracing an explicit dual mandate and offer policy recommendations.
Socioeconomic Context in Namibia
Namibia grapples with severe socioeconomic issues including elevated unemployment, high inequality, and widespread poverty. The unemployment rate has remained stubbornly high above 30% for decades. Income inequality is among the highest in the world, with a Gini coefficient of 0.572 in 2016. Over a quarter of the population lives below the poverty line.
The COVID-19 pandemic has exacerbated these structural challenges. Real GDP contracted by 8% in 2020, while over 130,000 jobs were lost. Addressing endemic unemployment and profound income disparities remains a pressing priority as Namibia seeks an inclusive post-pandemic economic recovery.
Monetary policy alone cannot resolve these deeply entrenched issues. But it can play a complementary role to fiscal policy in stimulating job creationand income growth when conditions permit. This underscores the need to review the central bank's mandate.
Evolution of Central Bank Mandates
Historically, most central banks focused narrowly on price stability defined as low, stable inflation. However, the devastating socioeconomic impacts of the Great Depression spurred a rethink. Central banks were blamed for prioritizing low inflation over real economic outcomes like jobs.
This paved the way for dual mandates. The US Federal Reserve adopted maximizing employment as a formal objective alongside price stability in 1977. The Reserve Bank of Australia also has a dual mandate targeting inflation and full employment. The Bank of England incorporated employment alongside inflation only in 1997.
The global financial crisis further reinforced the role of central banks in mitigating risks and supporting growth. Unconventional monetary policies were deployed to fight deflationary forces and stimulate economic recovery. Managing the trade-off between inflation and employment continues to dominate central bank agendas.
Rationale for a Dual Mandate
The fundamental rationale for central banks embracing dual mandates is the ability to pursue price stability while also stimulating job creation through monetary policy where possible. The facets of this argument are examined below:
Flexibility in policy approach: A dual mandate provides central banks with greater versatility in deploying monetary policy tools compared to a narrow inflation targeting focus. Interest rates can occasionally be lowered to support growth and employment without necessarily stoking high inflation.
Mitigating trade-offs: Carefully managed expansionary policy can promote job creation and income growth in a low inflation environment. This helps achieve a more optimal balance between price stability and employment objectives.
Complementing fiscal efforts: Monetary measures that foster growth and employment can augment the government's fiscal initiatives aimed at skills development, infrastructure building and social welfare - enabling a coordinated and holistic developmental approach.
Central bank independence: A dual mandate need not undermine the central bank's independence or inflation fighting credibility if statutory primacy continues to be accorded to price stability as is the norm globally. Commitment to low inflation remains intact.
Socioeconomic relevance: An explicit employment objective connects the central bank's mandate directly to real outcomes that matter to people's lives - incomes, jobs, poverty reduction. This underscores the central bank's developmental relevance.
Global best practices: Central banks in both advanced and emerging economies with dual mandates have achieved positive socioeconomic outcomes, proving it is a viable and prudent approach.
Key Risks and Mitigants
However, adopting a dual mandate also carries important risks that need to be carefully mitigated: Diluting focus on inflation: Being distracted from the core objective of price stability can jeopardize hard-won credibility and stoke inflation expectations. This needs to be managed by retaining clear statutory primacy for inflation targeting.
Fiscal dominance: Excessive monetary stimulus could lead to fiscal profligacy and uncontrolled public debt accumulation which central banks will have to monetize - undermining independence. Strict coordination mechanisms between fiscal and monetary authorities are essential safeguards.
Financial imbalances: Overly loose policy could create asset bubblesand financial sector risks. Macroprudential oversight and targeted interventions would have to be strengthened as countermeasures.
Policy conflicts: With a dual mandate, the central bank may have to occasionally prioritize either inflation or employment given changing economic dynamics - leading to trade-offs. Effective forward guidance and transparency are key to navigating policy dilemmas.
Mandate overload: A dual mandate could overburden the central bank, by expecting it to resolve socioeconomic challenges alone. The limits of monetary policy need to be recognized - it can only play a complementary role to fiscal policy.
These risks underscore that implementing a dual mandate is certainly not without its challenges. But as the experience of central banks like the Fedshows, risks around diluting focus on inflation fighting and fiscal dominance can be mitigated via robust institutional frameworks and prudent policymaking.
The Case for Namibia
The socioeconomic imperatives in Namibia present a strong case for the BoN to consider a formal dual mandate. Persistently high unemployment, especially youth joblessness, and glaring income inequality are not just economic problems - they engender grave social repercussions too.
Monetary policy priorities need to reflect this reality. An explicit employment objective would provide the BoN with the flexibility to appropriately time and calibrate policy measures leveraging interest rates, reserve requirements or quantitative easing to support job creation and equitable growth.
For instance, the BoN could lower interest rates to boost credit access for small and medium enterprises when inflation is contained. Or relax loan-to-value ratios for low-income housing finance when the economy has spare capacity. Such targeted steps can supplement the government's development initiatives through a coordinated strategy.
Of course, this policy space can only be responsibly used when inflation expectations are firmly anchored. The primacy of price stability would need to be hardwired into the BoN's mandate as a safeguard. Clear communications, data-dependent decision making and macroprudential oversight would also have to be enforced.
Further, recognizing the limits of monetary policy is important - it cannot independently resolve structural unemployment or inequality. But it can play a meaningful complementary role to stimulate productive investment, human capital development and financial inclusion.
In conclusion, while not without risks, adopting a dual mandate can equip the BoN with greater versatility in its policy toolkit to address Namibia's considerable developmental challenges and promote inclusive growth. It may enable the BoN to actively foster conducive conditions for job creation and rising living standards when circumstances permit, while maintaining its core priority of low inflation.
However, the success of this approach is contingent on robust institutional frameworks to preserve central bank independence and macroeconomic stability. Overall, a dual mandate merits careful consideration by the BoN. But it should not be viewed as a panacea. Ultimately, a holistic national development strategy synchronized across fiscal, monetary and structural policies will be essential to spur broad-based socioeconomic progress in Namibia.
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