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The twist in monetary policy

Aug 26, 2015 Features / Columnists, Peeping Tom

It came as a surprise that the government, in the 2015 Budget, would treat as Budget agencies, the very institutions and constitutional commissions which it had committed as subvention agencies, so as guarantee these bodies independence from Executive Control.
It was a major embarrassment to the new government to have had the opposition point out that it had blundered and technically had estimates which were in violation of the very laws that APNU/AFC had championed.
It is the sort of foul-up that usually leads to resignations or sacking. But in this case it was a technical foul-up, one that is more an embarrassment than any deliberate intention to bypass the law. It will be corrected.
But because the Budget took three months to be prepared and because the government had as one of its first acts passed laws to grant independence to certain constitutional bodies, it is a serious embarrassment for the government to find itself having to move a motion to correct a problem which it ought to have avoided.
It will also bring the new government “down to earth” and make them realize that similar mistakes have to be avoided in the future, not just in terms of the Budget, but in other ministries.
All the hullaballoo over the estimates and about the voting rights of the Prime Minister when performing the duties of President have detracted from the fact that it is difficult to identify how this Budget, apart from the increase in pension, really benefits the ordinary man.
It has also blindsided perhaps the most important issue that this Budget has raised, and which the opposition has failed to make an issue of – perhaps this is part of their strategy to allow the government to commit mistake after mistake.
The most important issue is the monetary policy of the government. Quite frankly, everything in the Budget means little if the government is going to pursue this policy of sterilizing liquidity by withdrawing billions out of the banking system.
It does not matter that the money may not be earning much interest. It does not matter that the money belongs to the government. What matters is the effect of such a significant sum being withdrawn for the purposes of reducing the Budget deficit.
It is an extraordinary gambit. If it succeeds the Minister of Finance should receive the Nobel Prize for Literature. If it fails, then the consequences for the entire country will be terrible. The financial system can collapse and take down the economy with it.
Conventional wisdom is that sterilization is best done through Central Bank lending.
Well, if you withdraw large sums from the banking system you are substituting a time-tested measure, one that has been extensively supported in numerous papers on monetary policy, for a measure which essentially concedes to those who made misinformed demands for “parallel treasuries.”
Convention wisdom will indicate that it is dangerous to take the approach being proposed by the government. But perhaps APNU/AFC possesses a higher wisdom than those who are paid to conduct research on monetary policy.
A debate is needed on this measure that APNU/AFC is proposing. Can reducing the deficit be so important to take such huge risks as is being proposed? Time will tell. But in the meantime, there are serious questions to be answered about this twist in monetary policy.

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