Central banks are the most competent institutions for maintaining

and sustaining their countries’ economic stability. Central banks

in Africa, including Bank of Zambia are changing as the continent

develops increasingly integrated with the global financial system

It is imperative that central banks have legal independence

besides their actual sense of the independence, but others may

dispute stating that the central bank and government should

coordinate their action for the purpose of achieving some specific

priority macro-economic objective. Therefore, this assignment

will critically discuss whether the Bank of Zambia is independent.

In Roland (2014)’s view, “a central bank, reserve bank, or monetary authority is the institution
that manages the currency, money supply, and interest rates of a state or formal monetary union
and oversees their commercial banking system”. The Bank of Zambia (BOZ or the Bank) is
Zambia’s central bank and is charged with the responsibility of creating and implementing
monetary policy to ensure the country’s macro-economic stability. Currently, the legal
framework for Bank of Zambia operations, defined as the legislation that directly impacts on the
Bank of Zambia, comprises the Bank of Zambia Act, No. 43 of 1996 and the Banking and
Financial Services Act, Chapter 387 of the Laws of Zambia. The 1996 Act repealed and replaced
the Bank of Zambia Act of 1985. This was to establish a modern legal framework that would
respond to the needs of the times following the liberalization of the economy in 1991. (Chiumya
2004).

Governments generally have some degree of influence over even "independent" central banks;
the aim of independence is primarily to prevent short-term interference. The Bank of Zambia
(2015) report says, “it enjoys a high level of independence although provisions have been
included in the draft constitution to address its autonomy”. Advocates of central bank
independence argue that a central bank which is too susceptible to political direction or pressure
may encourage economic cycles, as politicians may be tempted to boost economic activity in
advance of an election, to the detriment of the long-term health of the economy and the country.
In this framework, independence is usually defined as the central bank's operational and
management independence from the government. There are areas in which the influence of
government is comprised or drastically condensed. These are as follows.

Firstly, the Bank of Zambia has anatomy of personnel independence. Personnel independence
refers to the influence that government has a say in appointing members of the board of the
Central Bank. If government appoints members with the intention of supporting government
policies on the board, the bank will be less independent. This element assesses the nomination
and dismissal of the Governor and members of BOZ’s decision-making bodies as pertains to the
political authorities. In practice, it is not feasible to exclude government influence completely
when appointments are made to such an important public institution as a central bank. Personnel
independence therefore depends on the influence that government has in the appointment
procedures. Various criteria are relevant here, such as government representation in the
governing body of the central bank, appointment procedures, terms of office and procedures
governing dismissal of the board of the bank. Section 10 of the Act vests the power of appointing
the Governor in the President of the Republic of Zambia. This appointment is for a period not
exceeding five years, and hence protects the Governor’s term of office. In terms of section 10
(2), this appointment however, is subject to ratification by the National Assembly. Further,
section 13(1) (b) vests the power of appointing Members of the Bank’s Board in the Minister of
Finance and National Planning. Finally, sections 10 (7) and 14(2) give the power to remove the
Governor and members of the Board to the respective appointing authorities. Their terms in
office is specified in sections 10(1) and 14(1), which gives the Governor five years and Directors
three years, respectively. A key point is that the power to appoint and remove both the Governor
and board continue to vest in the Executive.

Secondly the Bank of Zambia is financially independent. No central bank can operate in a
credible and independent manner without proper financial means. politicians can easily influence
the Bank’s policy directly or indirectly thus compromising not only its financial independence
but also its legally mandated tasks. The financial independence of the central bank or its financial
strength means the ability of the central bank to meet all its goals with its own resources, and
independent decision-making on measures that will be applied and the instruments to be used for
their implementation. As Mboweni (2000) states, “the power of spending money should
somehow be separated from the power of making money’. Although the central banks have
functional, institutional and personal independence, their overall independence will be
jeopardized unless if they are not able to generate enough financial resources to exercise their
functions. According to the Statute of the European System of Central Banks (ESCB), the
Member States must not allow their central banks to bring themselves in the situation of not
having enough financial resources to carry out their tasks related to the European System of
Central Banks (ESCB) (Amtenbrink 2005), Yet, the government enjoys the ability to directly
finance expenditure and deficits through Central Bank operations, the bank, and thus monetary
policy, is seen as being influenced by fiscal policy and is therefore less independent. In this
regard, four features necessary for financial independence include the right to determine its own
budget; the application of central bank-specific accounting rules; clear provisions on the
distribution of profits; and clearly defined financial liability for supervisory authorities. The Act
contains several provisions regulating the way the Bank is to conduct its financial affairs and the
government’s responsibility towards its financial well-being. In the first instance, section 6(3)
makes it clear that the Government is the sole subscriber to the paid-up capital of the Bank and
its holdings of the paid-up capital is not transferable in whole or in part nor can it be subject to
any encumbrance whatsoever. Per section 6(5), whenever the BOZ Board certifies that the assets
of the Bank are less than the sum of its capital and other liabilities, the Minister is required to
cause to be transferred to the ownership of the Bank negotiable and interest bearing securities
issued by the Government for such amount as is necessary for the purposes of preserving the
capital of the Bank from any impairment. Though regulator of the banking system, BOZ then
was also perceived by the government of the day, as an instrument of national investment policy.
For instance, Bank of Zambia acquired an equity stake in the Development Bank of Zambia,
initially wholly government owned vehicle for long term debt and equity finance and the Zambia
National Commercial Bank, the only commercial bank wholly that was owned by the
government.

Thirdly, the Bank of Zambia has policy independence. Policy independence is related to the
room for maneuver given to the central bank in the formulation and execution of monetary
policy. A central bank has goal independence if it can decide on the formulation of its ultimate
objectives. In practice, most central bank laws formulate one or more objectives. For instance,
Section 4 of the Bank of Zambia Act provides that the functions of the Bank shall be to
formulate and implement monetary and supervisory policies that will ensure the maintenance of
price and financial system stability to promote balanced macroeconomic development. However,
Monetary policy is heavily influenced by the government’s view as to where they want interest
rates to be in an environment of controlled pricing, and their priorities about rural lending and or
other Small and Medium Enterprise (SME) activity. In this regard BOZ Deputy Governor Danny
Kalyalya (1996) has stated: Prior to 1992 monetary policy had multiple objectives. Targets had
also not been well defined, and the implementation of monetary policy relied mainly on direct
instruments which included fixed interest rates and credit allocation, core liquid assets and
statutory reserve requirements. Equally important, the financing of the Government fiscal budget
relies heavily on central bank borrowing. As it turned out, real interest rates were for the most
part negative which resulted in high levels of disintermediation, as economic agents shunned the
banking system in preference for other forms of assets that could under the circumstances
provide a hedge against loss of value. Moreover, often the monetary policy was loose, mainly as
a way of providing relatively cheap credit to state owned enterprises, resulting in high growth
rates in domestic credit and consequently in the money supply. (Cottarelli and Giannini, 1997)
point out, “if the central bank has been trusted with various and possibly conflicting goals such
as achieving low inflation and low unemployment, it has considerable scope in deciding its
priorities”. In that case, the central bank has considerable goal independence since it is relatively
free to set the final goals of monetary policy. It could for instance, decide that price stability is
less important than output stability, and act accordingly.

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