Why is this a hot topic?
A Foreign Exchange Management Bill appeared on the website of the Pyidaungsu Hluttaw on 27th of December 2019. The bill includes provisions and regulations for trading and holding of foreign exchange, gold and jewelry, and transfers and payments of current and capital accounts, under the authority of the Central Bank of Myanmar1.
In analysing this bill, therefore, it is necessary to first consider the appropriate roles and functions of a national central bank, including with reference to international examples.
What is a central bank?
A central bank is a financial institution that has control over the production and distribution of money and credit for a nation (or a group of nations). In modern economies, the central bank is usually responsible for monetary policy, and the regulation of banks2.
Many central banks are not government agencies and are claimed as being politically independent. However, even if a central bank is not legally owned by the government, its privileges are established and protected by law.
The critical feature of a central bank is that it has the privilege to issue bank notes and cash. By easing or tightening the money supply and availability of credit, central banks seek to keep a nation's economy balanced. The main functions of a central bank may include3:
- implementing monetary policies
- setting the official interest rate – used to manage both inflation and the country's exchange rate – and ensuring that this rate takes effect via a variety of policy mechanisms
- controlling the nation's entire money supply
- the Government's banker and the ‘bankers' bank’
- managing the country's foreign exchange and gold reserves and the Government bonds (the subject of the aforementioned Myanmar Bill)
- regulating and supervising the banking industry
Central banks and international law
Central banks are the principle bodies when it comes to monetary policy, and there are no international laws governing the way in which central banks operate. The International Monetary Fund (IMF), however, was established in 1944, conceived as a means to coordinate the fiscal policies of nations worldwide in order to prevent a recurrence of the economic conditions that contributed to the onset of World War II. Today the IMF represents 189 member nations and conducts economic monitoring; provides loans; and support governments with fiscal policies4. It should be noted that unlike the UN, where one country has one vote, IMF governance is skewed in favour of larger economies.
The IMF, and its sister organisation the World Bank, have come under significant criticism in the past, for applying stringent conditions to loans to developing countries that have been blamed for starving public services of funding and deepening inequality. Whilst increasingly recognising the problems of inequality, the IMF and World Bank remain advocates of lasses-faire economic policy and stand generally opposed to subsidies or other market interventions that might safeguard human rights or the environment5.
Most central banks in modern industrialised economies are independent from government. In practice this means that some form of governance, such as a monetary policy committee or, in the case of the US, the Federal Reserve Board, exists in order to ensure the bank is not under the direct control of the executive branch. It is argued that, shielded from pressures of day-to-day politics, central banks can take a longer-term view and make unpopular decisions to control the damaging effects of inflation.
However, since the 2008 global financial crisis this view is increasingly challenged. Some argue that under the protection of their independence central banks have become secretive and serve the interests of only private bankers. Populists leaders such as Donald Trump and Recep Tayyip Erdogan have in particular taken aim at their central banks6. In a period of economic decline, politicians often look for a scapegoat and it may be easier to blame central bank monetary policy rather than be held to account for failings of wider economic policy.
The most important thing to consider then, regardless of whether the central is under executive government control or not, is the extent of transparency and accountability in their operations. For example, the Bank of England publishes the outcomes of monetary policy committee meetings, as well as the voting record of individual members.
Central Banks and gold
Up until the mid-20th century, it was common for national currencies to be backed by a fixed quantity of gold. Known as the gold standard, this meant this each unit of currency was based on a fixed amount of gold7. In theory this meant every £10 note in the hands of English-man or woman was representative of an equivalent quantity of gold held in the Bank of England vaults.
The advantage of the gold standard was that people had confidence their money was worth something tangible, and so runs on banks or hyperinflation could be kept in check. Conversely, however, an international gold standard was particularly unfair to countries with little or no gold production. Economists also argued that if all money must represent a physical quantity of a particular commodity, it is more difficult to increase money supply as a mechanism for fighting inflation8. Subsequently the gold standard was dropped.
Today, a currency’s value is determined largely by its value in foreign exchange markets, most typically valued against the dollar9 although with the rise of China this inherent advantage for the US as being the home of the ‘international currency’, may one day be under threat . Whilst currency is no longer directly backed by gold reserves, the value of gold and other precious metals or jewels remain an important indicator of economic stability, and as such many central banks still hold large quantities on behalf of governments and private owners. The Bank of England, for example, holds around 400,000 gold bars in their vaults, worth approximately £200 billion and making up 15% of official declared gold reserves globally10.
Considerations for policy-makers
In 2015, the IMF published the results of a survey of IMF staff which resulted in a list of principles for sound monetary policy by central banks in developing or low-income countries11. As with many areas of public policy, this report highlights key areas including transparency and integrity. Consideration when reviewing the current Foreign Exchange Management Bill should include:
- Central banks must have a clear mandate and operational independence to pursue monetary policy related to economic goals. Whilst the executive has clear responsibility for fiscal policy (eg taxation and investment in public goods), the central bank must have clear independent control of monetary policy (i.e. setting and publishing interest and foreign exchange rates). Any interference, such as the proposed emergency measure allowing the Union government to take control of the CBM policies, should be closely scrutinised.
- Central banks should have a clear and effective operational framework aligned with market conditions and the policy stance of the country. Notwithstanding the problem that the current Myanmar government has not articulated a clear policy stance regarding the economy, the central bank should clearly publish the rules and regulations associated with its remit, including monetary policy and banking regulations.
- Central banks must establish clear and transparent communications. Transparency on matters of fiscal, monetary and economic policy is imperative in order to give all interests an equal opportunity to make informed decisions. Where decision-making and policies are hidden from view, frequently this gives an unfair advantage to elite interests with connections to powerful decision-makers.
1. Central Bank of Myanmar, 2015. https://www.cbm.gov.mm/
2. Investopedia, 2019. Central Bank. https://www.investopedia.com/terms/c/centralbank.asp [Accessed 20 January 2020].
3. Wikipedia, 2020. Central Bank. https://en.wikipedia.org/wiki/Central_bank [Accessed 20 January 2020].
4. International Monetary Fund, 2019. About the IMF. https://www.imf.org/en/About [Accessed 20 January 2020].
5. Bretton Woods Project, 2019. What are the main criticisms of the World Bank and the IMF? https://www.brettonwoodsproject.org/2019/06/what-are-the-main-criticisms-of-the-world-bank-and-the-imf/ [Accessed 20 January 2020].
6. Bloomberg, 2019. Central Bank Independence. https://www.bloomberg.com/quicktake/central-bank-independence [Accessed 20 January 2020].
7. World Gold Council, 2020. The classical Gold Standard. https://www.gold.org/about-gold/history-of-gold/the-gold-standard [Accessed 20 January 2020].
8. Wikipedia, 2020. Gold Standard. https://en.wikipedia.org/wiki/Gold_standard [Accessed 20 January 2020].
9. The Balance, 2020. How the Value of Money Is Determined. https://www.thebalance.com/value-of-money-3306108 [Accessed 20 January 2020].
10. Crowell, R., 2019. The Bank’s Golden Evolution – A Question & Answer session with Victoria Cleland, Bank of England. The Alchemist, Issue 95, pp. 4-7.
11. International Monetary Fund, 2015. Evolving Monetary Policy Frameworks In Low-Income And Other Developing Countries. https://www.imf.org/~/media/Websites/IMF/Imported/external/np/pp/eng/2015/_102315pdf.ashx [Accessed 20 January 2020].