The Reserve Bank of Australia (RBA) review has provided some thought-provoking insights that central banks in the Pacific can leverage to strengthen their institutions. Briefly, key recommendations of the review include:
- A monetary policy fit for the future
~ A clear monetary policy framework
~ Stronger monetary policy decision-making and accountability - A high-performing institution
~ An open and dynamic RBA
~ More robust corporate governance
~ RBA leaders to drive institutional and cultural change
Some are asking if the RBA fit-for-future review might be a signal that central banks in the Pacific should consider conducting their own review to see whether they have been effectively delivering their objectives to their people. This article will share some insights on why this should be considered.
Let us start by proposing that a review to evaluate fit-for-purpose is a sensible starting point for Pacific central banks. This involves evaluating our current performance without projecting too far into the future. Given the constraints in the Pacific, it makes sense to focus on our present capabilities and explore improvements for the next three to five, or perhaps eight years. Planning beyond that might not be feasible.
Traditional central banking
If we were to measure performance by the traditional twin objectives alone, that is, inflation and foreign reserves management, the Pacific would have performed relatively well given the resources at our disposal and the risks encountered. The International Monetary Fund pegged inflation to have averaged under 5 percent in Pacific Island countries over the last 20 years, peaking at 10.7 in 2003 and a low of 3 percent in 2020. Spoiler alert, this has more than doubled by 2022 at 6.1 percent—for obvious reasons outside the control of small open island economies. Foreign reserve management across Pacific countries was also able to sustain a comfortable average above four months of imports and non-factor services ballooning to double digits in countries like the Solomon Islands, and Papua New Guinea over the last decade. All this amid ongoing economic and structural shocks in the form of natural disasters and political instability.
This shows some form of success. However …
Growing role of central banks in the Pacific
The scope and role of central banks in the Pacific is also expanding with most having financial inclusion departments and are the leading agency in implementing national financial inclusion strategies. Some are also administrators of collateral registries and operators of national payment systems. Furthermore, the central bank’s role in responding to climate change has recently been brought to the forefront. With most central banks in the Pacific responsible for financial stability, the financial system players are being called upon to play a more engaging role in helping Pacific Islanders fight the effects of climate change by either financing enterprises and individuals to build resilience or being more responsible by having a greener and climate-friendly portfolio.
With resources being diverted to these additional responsibilities (most by necessity), how confident are we that we can still effectively manage our primary roles? Have we improved? If so, by how much? Are we efficiently allocating resources to meet these roles? Should we be doing more or less? Are our additional efforts outside the tradition translating to better economic and social outcomes? Can we still be reliably measuring our performance by only monitoring the twin objectives given our increased roles?
These are some valid questions and thus provide an opportunity to evaluate performance, which can help chart a more informed strategy in the medium term.
Recommendations
A review of performance using new measures can help provide some answers to these questions. This review does not necessarily have to follow how RBA has conducted theirs by selecting a panel of experts who gathered information through interviews and research. To offer two simple suggestions, a review can begin as a simple internal self-assessment by a project team evaluating performance against a set of agreed criteria. This project team can comprise a cross-departmental representation of staff with the relevant leadership experience to collate data and report performance on the agreed criteria. The second suggestion is to evaluate performance as part of the strategic planning or review process. Central banks are at distinct phases of their strategic plan in 2023 and we can all acknowledge that the dynamics of economic and financial markets have drastically changed since 2020. It may be time to evaluate performance through either a mid-term review or a fully-fledged review to see whether we can provide some answers to the questions mentioned above.
Conclusion
In the wake of the pandemic, with the geopolitical challenges still looming within the region, supply chain pressures on the global front, our own economic, social, and political challenges, and before the Government or the public call for a review (for whatever reason), it may be prudent to conduct one to stay ahead of the curve. In the new world of opinions, free-flowing information, social media and propaganda, political capital management will continue to challenge the independence of central banks. A review like this and acting upon its recommendations will ensure changes are brought about more systematically and transparently as opposed to misguided changes driven by political alignment.
Sakiusa Nabou, Research Assistant, PICDPR (on study leave at Griffith from Reserve Bank of Fiji).
The views expressed in this article are those of the author(s) and do not necessarily represent the position of the above-mentioned institution. For more information about Pacific Island economies, visit the Pacific Island Centre for Development and Policy Research.
