Desist from debt monetisation, IMF cautions central banks
By Felicia Nwosu
The International Monetary Fund (IMF) has cautioned various central banks’ boards to desist from monetising excessive government debt by borrowing money. The global finance hub admonished various apex banks to refrain from financing excessive government debt, but suggested that it should be selling bonds to private investors or raising taxes.
Elaborating in a report titled: ‘Rethinking Monetary Policy in a Changing World’, the Washington-based institution harped on the strength of self-dependence in growing a viable and sustainable economy. It averred that the ability of central banks to set monetary policy and control the economy in more volatile times is dependent on their independence.
“As central banks hike interest rates and the government has to pay more for its debt, the hope is that authorities will cut back on expenditures, thereby cooling the economy and lowering inflation pressure,” the IMF said. The low interest rates and less extreme public debt levels that prevailed after the global crisis permitted central banks to ignore what were then relatively inconsequential interactions between monetary and fiscal policy,” it said.
The IMF noted that the period following the 2008 crisis was one of monetary dominance when central banks could freely set interest rates and pursue their objectives independent of fiscal policy. According to the notable financial institution, as spending was increasing, countries were hit by supply shocks of unprecedented proportions.
“Central banks proposed that the core problem was not raising prices, but the possibility that weak demand would lead to major deflation. As a result, they focused primarily on developing unconventional policy tools to allow them to provide additional stimulus. Central banks also felt emboldened to pursue policies that would simultaneously meet the need for further stimulus and achieve social objectives, such as hastening the green transition or promoting economic inclusion. During the COVID-19 crisis, circumstances changed dramatically. Government spending rose sharply in most developed economies.”
The organisation said the supply shocks were largely the result of pandemic-related problems such as supply chain disruptions.
“These added to inflation pressures. The pandemic demonstrated that monetary policy does not always control inflation on its own. Fiscal policy also plays a role. More importantly, the accompanying build-up of public debt raised the possibility of fiscal dominance—in which public deficits do not respond to monetary policy. Whereas low debt levels and the need for stimulus allowed monetary and fiscal authorities to act in tandem following the global financial crisis, the prospect of fiscal dominance now threatens to pit them against one another,” IMF added.
It explained that central banks would like to hike interest rates to rein in inflation, whereas governments hate higher interest expenses.
“They would prefer that the CBN cooperate by monetizing their debt, that is, by purchasing government securities private investors won’t buy. Central banks can retain independence only if they promise not to accede to any government desires to monetize excessive debt, which would then force authorities to cut spending or increase taxes, or both so-called fiscal consolidations. Central banks must remain well-capitalised to promote monetary dominance,” it said.
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