By Rodrigo Campos
June 2 (Reuters) - Central banks in the Middle East, Central Asia and the Caucasus need stronger protection from political pressure and government financing demands to keep inflation in check, an International Monetary Fund paper said on Tuesday, as the Middle East war revives price risks across vulnerable economies.
The paper, prepared by IMF staff, does not analyse the U.S.-Israeli war with Iran directly, but its findings come as higher energy costs, food price risks and fiscal
pressures again test central banks in a region where some governments have limited room to shield households from rising prices.
The authors said central bank independence is coming under renewed scrutiny as pressure on monetary policy to accommodate fiscal needs intensifies, adding that countries with stronger safeguards are better able to manage inflation, especially when hit by unexpected shocks.
"(Central bank independence), alongside a robust monetary policy framework, is associated with effective inflation management and is particularly helpful when confronted with unanticipated shocks to inflation," the paper said.
In practical terms, stronger central banks cannot prevent oil or food price shocks, but can help keep them from becoming entrenched. Meaningful improvements in independence were linked to inflation falling by about half a percentage point within a year, the paper said, with the effect building over time.
The benefits of stronger independence take time to materialise, partly because legal reforms are slow to implement and formal independence does not always translate into practice.
Countries with inflation-targeting frameworks, mainly in the Caucasus and Central Asia, tend to have stronger legal independence and clearer price stability mandates, the paper said, citing Armenia, Georgia, Kazakhstan and Uzbekistan as examples where central banks tightened policy quickly after the post-pandemic inflation surge.
Countries with exchange-rate pegs also achieved better inflation outcomes, supported by a credible nominal anchor, including Azerbaijan, Gulf Cooperation Council countries, Iraq, Jordan, Mauritania and Morocco, the paper said.
Inflation proved harder to control in economies with weaker monetary frameworks or heavier fiscal pressures, the authors found. They pointed to Lebanon, where economic collapse led to runaway inflation, while high domestic debt in Egypt and Pakistan may have complicated central banks' ability to raise interest rates quickly enough.
Algeria, Egypt, Jordan, Morocco and Pakistan were flagged as having relatively higher government borrowing from the banking system than the regional average, a sign of fiscal dominance that makes monetary policy more difficult.
(Reporting by Rodrigo Campos in New York, editing by Karin Strohecker and Susan Fenton)
