A central bank is said to be independent if it has the freedom to pursue its monetary policies without political or other external influences. The central bank of Kenya has struggled with achieving fully independence from the influences of both the politicians and and the government technocrats who wants to oversee its operations.
An independent central bank promotes:
1. Macro-economic stability
2. Orderly Economic Growth
3. A stable regulatory Environment.
The Central Bank of Kenya has failed in its quest to achieve all the 3 mentioned macro objectives, does it mean that CBK is still being controlled by some unseen hand?
The main measures of independence includes:
a) Instrument Independence-freedom to pick appropriate policies to produce a certain outcome in the economy. The choice of OMO-open market operations, change of CBR, Reserve ratio requirement
b) Legal Independence CBK independence should be enshrined in law, this form of independence is limited in Kenya since CBK is accountable at some level to a government official be it the PS ministry of finance, the minister for finance or the president.
C) Goal Independence freedom to select objectives of monetary policy whether it be low inflation, the target rate of unemployment, the level of GDP. The CBK has the right to st its own policy goals, whether inflation targeting, control of money supply or maintaining a fixed exchange rate.
d) Operational Independence the central bank should have the freedom to determine the best way of achieving its policy goals, including the types of instruments used and the timing of their use.
e) Management Independence- The authority to run its own operations(appointing staff, setting budgets, and so on) without excessive involvement of the government. The turn-over-rate of cbk governors can give us a clue on its Independence.
If a government is in the habit of appointing and replacing the governor frequently , it clearly has the capacity to micro-manage the central bank through its choice of the Governors, The governor should have a substantial term of office.
I guess you’ll concur with me CBK has not fully achieved its independence.