The International Monetary Fund (IMF) issued a research report on Tuesday highlighting that central banks in the Middle East, Central Asia, and the Caucasus region urgently need to strengthen institutional safeguards. This is necessary to protect against political interference and government financing demands in order to stabilize inflation, as renewed geopolitical conflict in the Middle East is pushing up price risks for fragile economies.

The report, prepared by IMF staff, does not directly assess the conflict involving the U.S. and Iran. However, current energy price increases, potential food price pressures, and fiscal strains are once again testing central banks across the region. Some nations face fiscal constraints, leaving them unable to subsidize citizens or cushion against rising prices.

The report states that in an environment where fiscal spending forces monetary policy to remain accommodative, the issue of central bank independence is under renewed scrutiny. Economies with stronger institutional independence have greater capacity to control inflation, an advantage that becomes particularly pronounced when facing sudden shocks.

"Central bank independence, coupled with a robust monetary policy framework, can effectively control inflation and is particularly significant when inflation faces unexpected disturbances."

From a practical standpoint, even enhanced central bank independence cannot shield economies from external shocks like oil and food price fluctuations. However, it can prevent short-term price spikes from evolving into persistent, entrenched inflation. The report estimates that following a substantive improvement in central bank independence, inflation falls by an average of about 0.5 percentage points within one year, with the policy benefits continuing to materialize over time.

Nevertheless, reforms to bolster independence have a long implementation cycle. On one hand, the process of enacting relevant legislation is slow; on the other, de jure legal independence is difficult to fully implement and enforce in practice.

The report indicates that countries in the Caucasus and Central Asia that employ inflation targeting generally exhibit stronger legal independence and have clearer statutory mandates for price stability. For example, during the post-pandemic surge in inflation, central banks in Armenia, Georgia, Kazakhstan, and Uzbekistan were able to swiftly tighten monetary policy.

Countries with pegged exchange rate regimes, such as Azerbaijan, Gulf Cooperation Council members, Iraq, Jordan, Mauritania, and Morocco, have also demonstrated impressive inflation control results by relying on credible nominal anchors.

The research also found that economies with weak monetary policy frameworks and heavy fiscal burdens face greater challenges in managing inflation. Lebanon has fallen into hyperinflation due to economic collapse, while high domestic debt in Egypt and Pakistan constrains their central banks, making it difficult to raise interest rates rapidly to curb inflation.

The report specifically names Algeria, Egypt, Jordan, Morocco, and Pakistan, noting that government borrowing from the banking system in these countries is significantly higher than the regional average. The characteristic of fiscal dominance over monetary policy is prominent, substantially interfering with the implementation of central bank policies.