The Advisory Group recognises that transparency is crucial for the stability and soundness of the financial system. The Advisory Group’s examination is not merely in relation to the international code but to address some issues relating to extant legislation/regulations which may need to be altered to move towards a convergence with international codes. In some cases rapid adherence to international codes would be detrimental as the prerequisites of a well developed financial market are clearly lacking and, therefore, there is a need for phased measures.

Traditionally, central banking policy formulation has been associated with an element of secrecy and indeed the hallmark of efficiency was often considered to be an unanticipated monetary policy. Such an approach was acceptable in a system where central banks were regarded as an arm of government and were not directly accountable to the public at large. Moreover, with tightly regulated systems, financial markets looked to the central bank for directions and markets behaved the way the regulators wanted them to function. But all this is changing. The world over it is being recognised that there is distinct advantage in the institution of autonomous central banks while the benefit of transparency is recognised generally. In the context of an autonomous central bank, transparency becomes imperative and in this context questions of transparency of policy formulation and operation and accountability have come to the fore. Adequate, timely and relevant information is a prerequisite for formulating effective policies. It is equally important for policy makers to be transparent in their operation so that uncertainties regarding intentions do not lead to destabilising market behaviour. With progressively freer markets, asymmetrical information between different participants in the market and between participants and the policy makers does not foster stability and soundness of the financial system. Financial institutions would be able to take rational decisions if they know the full background to policies and this would also help the better functioning of markets. While the policy maker cannot be expected to reveal the policy card ahead of policy action it is now generally accepted that well informed market participants contribute significantly to the improved functioning of markets and hence there is great merit in a conscious attempt to improve the extent of transparency in both policy formulation and operations. Per contra, opaque policies and ill-informed market participants contribute to sub-optimal policies and operations.

In the area of monetary and financial policies the need for greater transparency is set out in the IMF Code of Good Practices in Monetary and Financial Policies which emphasises the following four principles :

1. Clarity of roles, responsibilities and objectives of central banks and financial agencies.

2. The processes for formulating and reporting of monetary policy decisions by the central bank and of financial policies by financial agencies.

3. Making available to the public adequate information on monetary and financial policies.

4. (iv) Accountability and assurances of integrity of the central bank and financial agencies. Effective transparency requires more than mere release of information; it requires an understanding of the analytical underpinning of policy action. Ultimately, the objective is not merely transparency but to improve the underlying content and quality of policies.

The concept of transparency is contextual as it is intricately related to the legislative framework. For purposes of this Report, the Advisory Group has adopted the following concept of transparency. Transparency refers to an environment in which the objectives of policy, its legal, institutional and economic framework, policy decisions and their rationale, data and information relating to monetary and financial policies and the specifics of accountability of different agencies are provided to the public in an unequivocal and understandable manner and accessible on a timely basis. While good transparency practices for the formulation and reporting of monetary and financial policies help to contribute to the adoption of sound policies it should be added that transparency per se is not designed to offer judgment on the appropriateness or desirability of specific monetary or financial policies or their framework. The Advisory Group is of the view that the effectiveness of monetary and financial policies can be strengthened if the goals and instruments of policy are known to the public and if the authorities can make a credible commitment to meeting these goals. In making available more information about monetary and financial policies, good transparency practices promote the potential efficiency of markets. Good governance calls for central banks and financial agencies to be accountable, particularly where the monetary and financial authorities are granted a greater degree of autonomy, and transparency enhances the credibility and integrity of the policy formulation process which should pass the test of public scrutiny. In making public the objectives of monetary policy, the central bank enhances the public’s understanding of what it is seeking to achieve and it also provides a context for articulating its own policy choices, thereby contributing to a better appreciation of the monetary policy. Furthermore, by providing market participants with a clear perception of the considerations guiding monetary policy decisions, transparency about the policy process makes the monetary policy transmission mechanism more effective by ensuring that market expectations are formed more efficiently. By providing the public with adequate information about its activities, the central bank establishes a mechanism for strengthening its credibility by matching its actions to its public statements. Transparency by financial agencies, particularly in clarifying their objectives, also contributes to policy effectiveness by enabling financial market participants to better assess the context of financial policies, thereby reducing uncertainty in the decision making by market participants. Moreover, by enabling market participants and the general public to understand and evaluate financial policies, transparency is likely to be conducive to good policy making, which can promote systemic stability. Transparency would infuse confidence that decisions are taken in an objective manner even though they may be judgemental and discretionary. The obverse of transparency is full disclosure by market participants. Transparency should not be viewed as an end in itself but a necessary prerequisite of good governance as policy actions pass through, as mentioned earlier, the test of public scrutiny. Transparency should be viewed as a post facto phenomenon as it is not always possible for the authorities to share with the general public sensitive viewpoints and issues or give away advance information on policy action. Nevertheless, the importance of adequate communication for transparency to be effective cannot be over-emphasised.

The Advisory Group is of the view that clarity in the objectives of monetary policy is a prerequisite for any meaningful transparency in monetary and financial policies. It recognises that the objective of economic policy, of which monetary policy is a part, is the responsibility of government. The government, while setting out the framework of objectives, should, in the first instance, set out these objectives before the legislature and after endorsement by the legislature entrust to the central bank the task of attaining these objectives insofar as national policy is concerned. In this context it is important to clearly set out the content of transparency i.e. what should be disclosed by the central bank. While it is obvious that essential factual data inputs into the policy formulation should be disclosed, a question that arises is whether the process of decision taking should also be disclosed; this is particularly relevant as monetary policy has an element of judgement and discretion which could give rise to a diversity of views and also because there are complex and long lags in the impact of policies.

While viewing the feasibility of transparency it is useful to distinguish between objectives, strategy and instruments. It is universally acknowledged that there should be clarity while revealing the objectives but there are some concerns about the impact of greater transparency in revealing strategies and use of instruments. A mere articulation of objectives without some articulation of the strategies and choice of instruments would not help guide market expectations. Increased transparency in the setting out of strategies and the choice of instruments does have certain distinct advantages. The Advisory Group is of the view that greater transparency would compel the authorities to bring about a greater degree of rigour in the formulation of strategies and choice of instruments and there are distinct advantages in a well-informed public debate on the objectives and instruments. When markets have a better appreciation of the central bank’s strategy, economic agents can play a more effective role in equilibrating markets. Greater transparency in these areas can then be expected to bring about greater rigour in the process of policy formulation by the central bank, better public appreciation of policy decisions and more importantly a more expeditious policy transmission.

As the IMF Supporting Document points out, the focus of transparency practices should be on the materiality and relevance of information made available to the public. Moreover, transparency to be meaningful would require that conflicting regulations should be avoided. Again, the credibility of transparency would come under question if disclosures which are normally being made are held back on the ground that such disclosures could cause discomfort to the authorities.

The benefits for countries adopting good transparency practices in monetary and financial policies have to be weighed against the potential costs. Where increased transparency in monetary and financial policies could endanger the effectiveness of policies, or be potentially harmful to market stability or the legitimate interests of supervised and other entities, it may be necessary to limit the extent of transparency. For instance, certain disclosures could adversely affect the decision-making process and the effectiveness of policies. Markets could be disrupted, the free flow of discussion by policy makers could be inhibited and there could be reluctance to formulate contingency plans. The Advisory Group recognises that there may be good reason for central banks not to disclose certain internal deliberations and documentation and near-term monetary and exchange rate policy implementation strategies. Additional concerns could be posed by some aspects of the transparency of financial policies. Moral hazard, market discipline and financial market stability considerations may justify limiting both the content and timing of the disclosure of some corrective actions and emergency lending decisions and information pertaining to market and entity specific conditions; illustratively, the central bank may not wish to contemporaneously make public its actions to prevent a panic run on a bank/institution, though post facto it would be a salutary measure to reveal its actions. Excessive insistence on transparency could encourage increased reticence in implementation of policies and the policy response lag could increase. In effect, the authorities have to display considerable finesse while drawing the line on disclosures.

While various factors may provide for legitimate caution in disclosures by the central bank, the Advisory Group cautions that these factors should not provide an excuse for opaque policies. In fact, the emphasis should be on making available to economic agents as much information as possible without disrupting markets and or individual entities.

The Advisory Group recommends that the monetary policy objectives, within the ambit of the broad mandate set by government with Parliament’s endorsement, should be transparently set out in unambiguous terms. As regards strategies and choice of instruments the Advisory Group recommends that there should be a progressive movement towards greater transparency as ultimately it will elicit market support. The Advisory Group, however, does appreciate that excessive transparency regarding the future path of policy could be counterproductive; there is, nonetheless, merit in the central bank preparing the market to adjust to future policy changes by making available relevant information. Monetary policy is only an aspect of overall economic policy and, therefore, there is need for convergence in policies as also transparency in other aspects of economic policy.