PARLIAMENT EXPECTED TO PASS AMENDED LAW ON CENTRAL BANK THIS WEEK
Parliament is currently discussing the draft amendment to the Law on the Central Bank and is expected to approve it by the end of the week. Some articles in the draft bill, intended to improve the “autonomy and independence” of the central bank, were not supported in the discussion of the law in the parliamentary Economic Standing Committee.
The Economic Standing Committee removed an article which prohibited Cabinet from giving recommendations or directives. This article was reinstated back into the law after it was supported in Parliament. As stated in the draft bill, prohibiting Cabinet from giving recommendations or directives to the central bank is good practice around the world. It was noted that the decisions of Cabinet must be made in connection to the decisions made by the central bank.
Parliament removed an article which prohibited Parliament from giving recommendations or directives to the central bank. The annual monetary policy guideline drafted by Mongol Bank is approved by Parliament. Members of Parliament voted to keep the monetary policy guideline annual and removed the article to make the guideline a three-year plan. The draft bill also states that policy decision-making, implementation, and supervision will be conducted by separate committees.
Another key part of the bill was modifying the main goal and purpose of the central bank to ensure price stability. Director of the Monetary Policy Department at Mongol Bank B.Bayardavaa delved more into the change of the main purpose of the central bank.
Parliament is set to finish up the final discussions on the new draft bill of the amended Law on the Central Bank. Let’s discuss the main points of the new law including the goal, governance, and autonomy of the central bank. The draft bill states that ensuring price stability is the main purpose and goal of the bank. Is this different compared to the practices in place in other countries? What is the significance of the change in the goal of Mongol Bank?
The legal reform that is being undertaken with the new draft bill introduced to Parliament is designed to improve upon the previous ideologies and principles of the bank and how we can improve upon our shortcomings and faults. It has nothing to do with the administration of the central bank wanting to increase its power. Thinking that the administration wants to increase their own wages or improve their opportunities is not correct. The new version of the law is meant to make the central bank’s operational goals more clear and understandable while also making decision-making more multilateral and consensus based.
The legal reform is looking at the long-term prospects. The main goal and purpose of the central bank is being changed to ensuring price stability or inflation. If we look at the current iteration of the central bank’s purpose, there are many confusing aspects. The terms inflation and exchange rate are very ambiguous.
During the process of drafting the new bill, members of the working groups noted that there was a lot of thought put into the first version of the Law on the Central Bank. Yet, we can see the effectiveness of the law they put into place with the foreign exchange reserve. During its existence, Mongol Bank has either sought to maintain the exchange rate or either the inflation rate. Different administrations had their own take on the issue.
In economics, this is explained as time inconsistency, [a situation in which a decisionmaker's preferences change over time in such a way that a preference can become inconsistent at another point in time].
The new bill will have inflation and price stability as the main goals of the central bank. The Four Asian Tigers and other developing countries have made inflation their main goal. The exchange rate does not have more of an effect than inflation. The legal reform of the central bank will make the central bank’s policy objectives very clear. By making objectives more clear, policy will not change as much. This in turn will help maintain a stable monetary policy.