ESTABLISHMENT
OF THE MONETARY POLICY COMMITTEE OF THE CENTRAL BANK OF
LESOTHO
Background
The Central Bank of Lesotho (CBL)
Monetary Policy Committee (MPC) was established on 28th
April 2004 in accordance with section 18 of the Bank’s
Bye-laws. The MPC, which shall meet once in a quarter, has
the responsibility to: (a) review international and
domestic economic developments and their likely impact on
the Bank’s ability to achieve and maintain price
stability; (b) consider and formulate appropriate monetary
policy responses in order to achieve and maintain price
stability in Lesotho; and (c) regularly review CBL’s
monetary policy framework and adopt changes as and when
necessary.
Role of MPC
in conducting Monetary Policy in Lesotho
Monetary policy, being an important
component of macroeconomic policy, must be implemented
effectively in order to achieve the goals of economic
development. An explicit monetary policy strategy will
enhance the transparency of monetary policy implementation
by establishing a framework for policy analysis and to
explain monetary policy actions to the public. Such a
framework is built upon the important role of money and an
assessment for price developments and stability based on
economic and financial indicators. Experience with
different monetary policy regimes suggests that
transparency and accountability are crucial for monetary
policy to achieve desirable long-run outcomes.
The CBL has been taking steps to
conduct the monetary policy in a more transparent and
accountable way. The Bank has also resolved that changes
in monetary policy stance and related reasons must be
clearly announced and explained. In addition, the Bank
intends to upgrade its public commentary on the economic
outlook and issues bearing on monetary policy setting,
through quarterly monetary policy statements (MPS) and its
regular quarterly report on the economy. It is intended
that these statements will include information on the
outlook for inflation.
The CBL acknowledges that to fast track and sustain
economic development, it is essential to maintain a stable
exchange rate vis-ŕ-vis the rand, adequate external
reserves, non-inflationary growth in money and credit
aggregates, prudent fiscal policy, certain level of donor
assistance inflows, and monitor developments in the global
economy.
Accordingly, the MPC
would be guided by the following when framing the monetary
policy and releasing the periodical monetary policy
statement:
·
The goal of monetary policy is to
achieve price stability that would promote sustainable
economic growth, full employment and a sustainable pattern
of international payments. Through monetary policy, the
CBL is able to maintain stable prices, thereby promoting
economic growth and maximum employment and favourable
external balance.
·
As a member of the Common Monetary Area
(CMA), Lesotho’s monetary policy stance is expected to be
consistent with that of the other member countries. It is
also essential that the monetary policy stance must
incorporate all commitments made under the CMA agreement.
·
CBL
recognises
the effectiveness of market friendly indirect monetary
policy instruments
in enhancing the role
of price signals in the economy. The Bank also
recognises
that, under current economic environment in Lesotho,
direct instruments of monetary policy are
ineffective and inefficient and might lead to an
overhang of liquidity, financial repression and
disintermediation. Being fully aware of these
adverse impacts of direct tools, CBL is unlikely to use
such direct instruments, unless exigencies warrant. The
Bank shall continue to use market based indirect tools to
conduct monetary policy.
·
The CBL
has developed a series of monetary sector models. These
models will be used as an input in making monetary policy
decisions.
·
The CBL
is also in the process of reformulating the macroeconomic
model of Lesotho to use for various macro-econometric
simulation studies to measure the impacts of policies on
target variables (such as employment, income and prices)
and, more importantly, to set the monetary policy rules.
Monetary policy rule, rather than discretion, shall
enhance transparency and accountability in conducting
monetary policy.
· Price
stability, as the target, does not provide simple and
mechanical instructions as to how the central bank should
conduct monetary policy. It requires that the central bank
uses all available information to determine the
appropriate policy actions to achieve price stability.
·
Monetary policy affects the economy
with considerable and variable lags. The CBL therefore
recognises that monetary policy should be
forward-looking and preemptive: that is, depending on the
lags from monetary policy to inflation (transmission
period), monetary policy needs to act well before
inflationary pressures appear in the economy.
· The
CBL would continually monitor and analyse current and
expected future economic and financial conditions, paying
particular attention to any signs of emerging price
pressures. This assessment involves comprehensive analysis
of external and domestic economic activity, financial
conditions and price and wage developments. The assessment
of economic and financial conditions provides the Bank
with a view of the extent of inflationary pressures and
the likely evolution of inflation over the next year. This
information is conveyed to the MPC periodically by the
Research Department of the CBL.
· The
MPC recognises that there must be a sound interplay
between fiscal policy and monetary policy to ensure
sustainability of economic developments. It would be
advantageous if fiscal policy could be used to counter
fluctuations in demand and output.
· The
CBL agrees that structural problems leading to higher
inflation in some sectors of the economy, stagnation or
poor growth and growing unemployment cannot be solved
exclusively or in isolation by the monetary policy. The
MPC shall assess the required structural measures and
present to the Government of Lesotho its recommendations
on addressing the structural problems.
· The
MPC recognise that a sound banking system is an essential
prerequisite for the efficient implementation of monetary
policy. This is more relevant under a rule-based monetary
policy regime contemplated. The MPC will announce the
rules clearly to the players in the market with an
expectation that they will follow them efficiently and
fairly.
·
The MPC
will issue a MPS to inform the public, both local and
overseas, of the outlook for monetary developments in
Lesotho and to ensure the Bank is more accountable and transparent in deciding
the key monetary policy objectives to be pursued during
the year.
Net
international reserves (NIR) target
At its first meeting held on the 1st
September 2004, at CBL, the MPC decided that the target
range for CBL net international reserves (NIR) for the
period to December 2004 will be US$400 to $450 million.
The target range for the NIR is at the same level as that
which was maintained from 2003 to the end of August 2004.
The Committee is satisfied that the NIR position of this
magnitude is sufficient to cope with the demands of the
economy.
Economic
developments
The MPC’s decisions were informed
mainly by a consideration of domestic inflation and
balance of payments (BOP) developments. On domestically
generated inflation, the Committee noted that costs of
factor inputs contributed to a downward trend up to March
2004. However, substantial increases in the costs of
important inputs exerted upward pressure on overall price
levels during May and June 2004. The MPC further noted
that there were no immediate inflationary pressures from
the demand side of the economy. As such, measures to
combat excess aggregate demand were not necessary.
The Committee also looked at the BOP
developments and noted that the medium term prospects are
favourable. As such, it decided to leave the NIR target
unchanged until December 2004. The Bank will, however,
continue to monitor developments, particularly, on the BOP
side.
Members of the Committee
The members of the Committee are Mr. E. M. Matekane
(Governor and Chairman), Mr. T. Foulo (Deputy Governor
II), Mrs. M. L. Moiloa (non-executive member of the
Board), Dr. M. Majoro (Principal Secretary for the
Ministry of Finance and Development Planning), Mr. E. R.
Mapetla (representative of the business community), and
one non-executive member of the Board who is an economist
and yet to be appointed to the Board.
Conclusion
The CBL among other functions, being
mandated with the maintenance of price stability in the
economy, will be able to achieve this objective through an
effective monetary policy framework to be determined by
the MPC. These meetings for the CBL are scheduled to take
place immediately after those of the South African Reserve
Bank (SARB). This emanates from the fact that SARB is the
key driver of monetary policy in the CMA region and the
decisions taken there will ultimately filter into the
other member countries with a lapse of time.
Consequently, appropriate monetary policy responses in
order to achieve and maintain price stability in the
country would be formulated by this committee.
