After 47 long years, the Nepal Rastra Bank Act was revised two years ago. Effective from 31 January 2002, the new Act laid down a non-political procedure for the appointment of the new governor. But that seemed not to matter this week as politicians, apparently in tandem with some donors, went head-to-head with one another over who should be made the new governor.
A list containing the names of three candidates was floated before last week's cabinet meeting. But it was set aside at the last minute to allow time for one name, supposedly favoured by the Prime Minister's Office, to be on it. Meanwhile, a pro-UML economist, who mastered his monetary policy concepts in the USSR, was busy accusing others of lobbying for certain candidates. And so it went: the political soap opera of selecting the next governor. Lost in the muddle were two basic questions: Why would anyone want this technical job through political connections? And how would anyone change the job to be of any lasting significance?
Whoever replaces Tilak Rawal as the next Rastra Bank governor, will have an increasingly technical and autonomous job. He is not to please political masters by printing money but to keep both the national financial system and the value of currency stable. A stable financial system makes it easier for banks, firms and individuals to make use of capital to engage in more economic activities. And a stable value of currency rewards those who earn, save, lend and invest money. If the Rastra Bank gets these two goals wrong, then a collapse of the banking system coupled with rising prices will hurt all of us. That is why, ideally, the governor should be a discreet, technically competent macroeconomist who has an international orientation, some private-sector (particularly banking) experience, an ability to make sense of a disparate array of information and a high tolerance for ambiguities.
But in all likelihood, the appointee emerging out of our political horse-trading will have few of those characteristics. If we are lucky, he will at least be a donor's darling, whose unspoken mandate will be to stick to the task of steering the boat of template-driven financial sector reform activities to shore. If not, he will be a toady to serve the short-term interests of politicians. Either way, he will be fulfilling others' agenda with nary a voice of his own. But all this is understandable because the mere act of granting more autonomy to the central bank through legislation does not mean that autonomy will actually get exercised.
Still, there are two ways the new governor can put his lasting imprint on the job. First, he should use it as a bully pulpit to drive home the point that it is imperative for Nepal to make use of clear and transparent rules and regulations that are compatible with the best practices from around the world. This means that, yes, probably wilful major loan defaulters get no quarters from anyone and cleaning up our collective financial mess is the first signal we can give others about being serious, ensuring the soundness and the predictability of our financial health. And second, in these times of internal strife, there is great temptation for the government to use the central bank as a piggy-bank to help pay for all sorts of defence-related expenses. Instead of doing the government's bidding, the new governor should aim to rise above the inevitable politics of the appointment process to assert the Rastra Bank's operational independence by keeping it loyal to the goals of a stronger economy.