David Opiokello: Confidentiality and transparency - the challenge to
Bank of Uganda and the media
Address by Mr David Opiokello, Acting Deputy Governor of the Bank of Uganda, at the Bank
of Uganda Media Workshop on Confidentiality and the Right to Public Information: Central
Banking Communications, Kampala, 24 May 2007.
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The Chairpersons
Resource Persons
Distinguished participants
Ladies and gentlemen,
It is my pleasure to welcome you all to the Bank of Uganda Media Workshop on the theme
"Confidentiality and Transparency: the Challenge to Bank of Uganda and the Media".
In the past, Central banking was shrouded in secrecy and mystery. There was a tendency to
keep the central bank out of the media and the media out of the central bank. Recently,
however, there has been greater visibility, transparency and a lot more communication.
There are three reasons for this development:
Firstly, increased independence of central banks led to the need for publicly accountable
conduct. Secondly, the adoption of inflation targeting required greater public visibility and
thirdly, a mandate to the central banks, either explicitly or implicitly, for maintaining financial
stability in a world where the financial markets and their expectations matter.
We are all aware that the Access to Public Information Act, to be discussed later in this
workshop, gives Ugandans the right of access to information in possession of the State or
any of the state organs or agencies except where the release of such information may
prejudice state security or sovereignty. Information could also be withheld if the release of
that particular information is likely to interfere with the privacy of any person. In the absence
of the above two reasons, it is the people's right to know and indeed the journalists' right to
gather and publish information.
The growing importance of communications by central banks is on account of their
responsibility for maintaining financial stability - which goes beyond the conduct of monetary
policy. There is an assumption that well informed market participants would facilitate, if not
assure, an improved functioning of the markets and the central bank is in the best position to
provide such useful information. However, whether providing information would result in
shaping and managing expectations, and if so, whether it is desirable, are difficult issues.
Much has been said about the external communication of central banks in recent years and
central bankers have reflected intensively on their external communication. Transparency,
candid explanations given to investors, savers, market participants, households and, to our
fellow citizens are essential for central banks. It is probably fair to say that communication is
an integral part of monetary policy.
A brief history of communication policy: communication of policy objectives, policy
framework, and economic forecasts.
In the 1960s, many economists were greatly interested in adapting sophisticated
mathematical techniques developed by engineers for controlling missiles and rockets to the
problem of controlling the economy. At the time, this adaptation of so-called stochastic
optimal control methods to economic policymaking seemed natural; for like a ballistic missile,
an economy may be viewed as a complicated dynamic system that must be kept on course,
despite continuous buffeting by unpredictable forces.
Unfortunately, macroeconomic policy turned out not to be rocket science! The problem lay in
a crucial difference between a missile and an economy - which is that, unlike the people who
make up an economy, the components of a missile do not understand and anticipate the
forces being applied to them. Hence, although a given propulsive force always has the same
predictable effect on a ballistic missile, a given policy action - say, a 2 percent cut in the
rediscount rate - can have very different effects on the economy, depending for example on
what the private sector infers from that action about likely future policy actions, about the
information that may have induced the policymaker to act, about the policymaker's objectives
in taking that action, and so on. Thus, taking the "right" policy action - in this case, changing
the rediscount rate by the right amount at the right time - is a necessary but not sufficient
condition for getting the desired economic response.
Most inflation-targeting and non inflation targeting central banks have found that effective
communication policies are a useful way, in effect, to make the private sector a partner in the
policymaking process. To the extent that it can explain its general approach, clarify its plans
and objectives, and provide its assessment of the likely evolution of the economy, the central
bank should be able to reduce uncertainty, focus and stabilize private-sector expectations,
and with intelligence, consistency, and persistence - develop public support for its approach
to policymaking.
Why are accountability and transparency so important for monetary policy?
The notion of transparency is broad ranging. It encompasses notions of accountability and
political legitimacy of decision makers, as well as the legal and accounting infrastructure in
which economic decisions are made. But from the operational perspective of a central bank,
transparency can be regarded more narrowly in terms of the disclosure of information to a
wider audience. Intuitively the release of a greater volume of more precise information in a
timely manner seems beneficial because it reduces asymmetric information and uncertainty
in financial markets. Information about the financial stability framework and public evaluation
of national balance sheets against the yardstick on international codes and standards offers
investors an opportunity to assess risk better and arrive at more informed decisions.
Moreover, greater clarity about financial stability policy potentially simplifies the task of
monetary and fiscal policy by establishing clear lines of responsibility and objectives. In an
environment of greater trust, effective communication by the central bank facilitates greater
flexibility to act by various agents in the economy.
Over the last few decades, it has been widely recognized that the maximum degree of
independence for central banks, together with a clearly defined mandate, is the best way to
ensure time consistency in the implementation of monetary policy and therefore guarantee
stable prices. Consequently, the 1995 Constitution of Uganda has granted the Bank of
Uganda full independence in the pursuit of its mandate. In a democracy, transparency and
accountability are the quid pro quo for that independence. In other words, it is the duty of
independent central banks to be transparent, accountable and to communicate. The BoU is
made more accountable by clearly explaining our objectives and decisions to the general
public, media, parliament and to the professionals in the financial markets.
But transparency is not only a duty for the central bank. It is clearly also in the bank's interest
to embark on an effective communication as it contributes considerably to the efficiency of its
policies. This helps to anchor the inflation expectations of the financial markets and the
public. Through efficient communication we can reduce inflation uncertainty and the costs
associated with such uncertainty for consumers and investors. Therefore it has immediate
economic benefits for society. We achieve this by being clear about our definition of price
stability and by being transparent in our actions. The economic agents and public need to be
convinced that the central bank's monetary policy decisions are consistently focused over
time on achieving the announced aim.
In a market-based economy the central bank can directly influence only short-term interest
rates through its monetary policy instruments. However, consumption and investment
decisions, and thus medium-term price developments, are to a large extent influenced by
longer-term interest rates, which depend on private expectations regarding future central
bank decisions and future inflation. It is important that these developments in longer-term
rates support the objective of maintaining price stability over the medium term.
This in turn
requires that the central bank is regarded as credible and predictable. A central bank which
does not succeed in communicating the principles underlying its monetary policy and is
perceived as acting in a non-systematic, discretionary manner will over time endanger its
reputation.
Therefore, the central bank's communication should ensure that markets understand the
systematic responses of monetary policy to economic developments and the current
assessment of the central bank. Successful central bank communication supports
predictability and correct price formation in financial markets, contributes to efficient
allocation of funds and reduces uncertainty about future interest rates. In an environment
where the predictability of interest rate movements and their relation with key
macroeconomic developments is well understood, firms can better manage their balance
sheets. This reduces both their vulnerability to economic shocks and their risk management
costs and creates the conditions for better investment decisions.
Transparency of the BoU
Let me now turn to the BoU and its concept of transparency and external communication. In
the BoU, it was understood at an early stage that external communication would be crucial
for the activities of the bank. Consequently, the BoU management adopted some
communication policy objectives and principles. Since then we have communicated to
enhance the effectiveness and efficiency of our monetary policy and to make the BoU,
accountable.
On this score, the publication of the key elements of the monetary policy strategy constitute
in itself a major step towards monetary policy transparency. One element of the strategy is to
quantify what the BoU is aiming at in terms of price stability, namely a below 5% inflation
rate.
It is also important for the BoU to clearly communicate what monetary policy can, and
cannot, achieve. For example, monetary policy cannot offset short-term changes in the
inflation rate, which are caused by economic shocks, such as sharp oil price increases or
higher administrative costs. It is thus a permanent challenge to explain any deviations in
inflation from the definition of price stability. At the same time, it is essential for the public to
be confident that such shocks do not call into question the determination and ability of the
BoU to deliver price stability over the medium term.
Bank of Uganda's communication in practice
The BoU, use a wide range of communication tools. I will mention only a few of them here:
The BoU publishes a large array of reports ranging from monthly, quarterly and annual
reports on key economic developments. We also use press briefings as a way of
communicating the bank's position and future actions. Lastly, the BoU management gives
interviews and makes speeches to many different audiences. Most of this information is also
posted on the BoU website. In them they explain the decisions taken and the BoU's view on
current topics within our sphere of competence.
In all this communication, it is the intention of BoU to send out various messages to the
public on wide ranging issues and events. We for example at periodic intervals, issue papers
on the state of the Economy. We also issue annual Banks Supervision reports. It is our
expectation that in the near future we shall begin issuing regular reports covering
developments in the payment system.
I should finally inform you that much as the media and indeed the public have the right to
access public information, the nature of our operations sometimes compels us to keep to
ourselves some of the information that comes to our knowledge through the execution of our
work.
Banking, by its very nature, revolves around confidentiality. To give a practical example, one
can only imagine how one would feel if details of one's personal bank account were to be
given out to a third party without the account holder's express permission.
Likewise, Bank of Uganda, as banker to Government and to commercial banks is bound by
the confidentiality and trust that exists between a bank and its customers. Most important of
all, the Central bank as the supervisor and regulator of the financial sector is charged with
the responsibility of ensuring that the financial sector is healthy and sound at all times so that
depositors' funds are safe. The relationship between the financial institutions we supervise
and the Bank of Uganda can, in this regard, only be compared to that of a patient and his or
her doctor. Reckless disclosure of information about the financial sector can end in disruption
and in the end cause a run on a bank. You should be informed that while it takes decades to
build and attain depositor confidence in the financial sector, it only takes a wink to get this
confidence shattered through irresponsible disclosures.
There have, therefore been occasions when we have had thoughtful inactions. In brief, we
have had open market operations, open mouth operations and open only eyes and ears
operations in regard to threats to financial stability.
Let me now address myself to what I regard to be the challenges to the media. In assessing
the contribution of the media to the financial sector as a public good, I would like to
distinguish among at least four types of effects. The first type is characterized as "the news
effect", which would normally reflect factual or formal positions or events. In a sense, the
media's reporting would be faithful and non-controversial.
A second type can be identified as rumour effect. Often rumours carry with them a
destabilising effect and in some cases have the potential to degenerate into self-perpetuating
or self-fulfilling events. The rumour effect can result into unintended losses or gains and
people may suspect that there are some vested interests behind such rumours. Needless to
say, the media's role will, on the whole, tend to be negative in this channel.
The third type is the survey effect. It is common for the media to carry out opinion polls.
These polls or surveys could have methodological and other problems in terms of reflecting
the true picture. These surveys have a tendency of influencing the perception of markets and
at times, the general public. In such a case, the contribution of the media would depend on
the scientific methodology adopted, transparency of assumptions and objectivity in the
presentation of results. Adequate care is a pre-condition to ensure a positive effect through
this channel.
Lastly, there is the interpretation effect. Here the media tries to interpret the stand taken by
policy makers or markets. The interpretation effect may be positive or negative depending on
professional skills as well as commitment to objectives. Responsibility and accountability
would be key to ensure positive effect through this channel. It is my conviction that the
media's responsibility is not confined only to their shareholders or to their subscribers, but
extends to a larger section of the public. It is therefore apparent that the challenges before
the media are not less than those before the central bank.
It is also fair to recognize that the media faces several dilemmas. There are always
pressures to be the first to report - a race to be the Number One and they also have several
stakeholders to cater for.
Let me end with a quote from the late Dr. I. G. Patel, former Governor of the Reserve Bank of
India:
"Communication is not just about transparency. It is also about education, guidance and
steering this in the right direction. In this, the central bank can be an honest broker between
government and the public and even the parliament".
I thank you.