Nigeria - Between CBN Autonomy And Economic Stability

The Central Bank of Nigeria (CBN) and members of the National Assembly have been at daggers drawn over the submission of the Bank’s proposed revenue and expenditure for this year.

The in-fighting has since led the commencement of a move to amend some portion of the CBN Act 2007, which confers operational autonomy on the banking sector watchdog. The bill to amend the CBN Act recently passed through the second reading at the House of Representatives.

Nevertheless, the move by the lawmakers has generated a lot of reactions as experts have argued that removing the autonomy of the apex bank portends danger for the economy. Some even said that the bill before the lawmakers is not in line with international practise as the case for independent central banks is increasingly accepted globally.

Central banks in most developed countries are designed to be independent and free from political interference.

For instance, the Maastricht Treaty of 1992, which enshrines the independent status of the European Central Bank (ECB) and the EU national central banks, has in many countries become the preferred means of providing an institutional framework for monetary policy.
A central bank is an institution that manages a country’s currency, money supply, and interest rates. It also regulates the operations of commercial banks and some other financial institutions.

Monetary policy goals of central banks include price stability, attainment of high employment rate, macroeconomic economic growth, exchange rate stability and maintenance of balance of payment equilibrium. Some areas of central bank independence include goal independence, operational independence and management independence.

The CBN, like others, has the core mandate of also ensuring a non-inflationary growth. It also has the responsibility to ensure a sound and stable financial system in addition to other developmental functions. These mandates and functions are peculiar to central banks all over the world, and no other institution performs such functions.

But the CBN has had a chequered history of autonomy since its inception in 1958, varying between autonomy and control. In the 1958 Act, the CBN was granted a measure of autonomy, which was gradually eroded until 1991 when the autonomy was restored.
The erosion of the Bank’s autonomy between the years coincided with military interventions in politics in Nigeria. Again, the autonomy was gradually eroded until 1999 when administrative and instrument autonomy were granted to the Bank, to shield it from political pressures in the implementation of policy.

From the inception of the Bank, the administrative structure has been that the Governor of the CBN presides over the Board of Directors and Executive Directors or Deputy Governors had always been on the Board. This arrangement, the experts said, had ensured easier, smoother and faster implementation of monetary and financial policies.

The Bill
The bill to amend the CBN Act which had passed through second reading at the House of Representatives provides for the appointment of a person, other than the CBN Governor, as the Chairman and the exclusion of CBN Deputy Governors and Directors as members of the bank’s Board of Directors.

It also seeks to divest the Board of the power to consider and approve the annual budget of the bank. The bill, according to its sponsors, would enhance transparency and entrench the principle of check and balances in the administration and operations of the CBN.

Mr. Adams Jagaba of the House of Representatives had argued that the amendment should be on the appointment of chairman and members of the board, responsible for policy formulation in the bank.

He had alleged that out of the 12 members of the board, as presently constituted; only the Accountant-General of the Federation and the representatives of the Ministry of Finance were from outside the CBN.

Jagaba had also said the amendment was also necessary to make the CBN Act conform to the Fiscal Responsibility Act.

CBN’s Defence
In its defence on the insinuation that it neither audits its accounts annually nor presents same to the Federal Government, the regulator had said that its accounts are duly audited by the Accountant General of the Federation (AGF). It also said it employs the services of two international reputable accounting firms in the preparation of the accounts.

The apex bank also clarified that contrary to the insinuation that membership of the CBN board of directors is dominated by appointees from within the institution; saying all members of its board are appointees of the president and are confirmed by the Senate.

Director, Corporate Communications Department, Mr. Ugochukwu Okoroafor, said: “In view of the weighty implications of these misrepresentations, it has become necessary to put the records straight. The financial year of the CBN ends on the 31st of December of each year and the audited annual accounts is usually ready in February in line with the provisions of Section 50 (1) of the CBN Act. No 7 of 2007.

“It is important to state that for the preparation of its annual accounts, the CBN employs the services of two international reputable accounting firms (among the big 8), based on the approval of the President.

“Upon the completion of the audit exercise, the Bank makes the accounts available to the Presidency and to the National Assembly through the latter’s relevant Committees. In addition, the CBN is audited by the Auditor-General of the Federation and appears before the Public Accounts Committees of the Senate and the House of Representatives to answer questions arising from the report,” he explained.

Commenting further on the board composition, Okoroafor declared that: “Sections 6 (1) and (2) of the CBN Act 2007, provide for 12 members of the Board; five internal and seven external. The Governor and the four Deputy Governors comprise the internal membership.

“There are seven external non-executive members, among who are two institutional members. Consistent with the provisions of the CBN Act 2007, the non-executive members constitute a clear majority of the Board of the CBN. All members of the CBN Board are appointees of the President of the Federal Republic of Nigeria and are confirmed by the Senate,” he added.

Experts’ Opinions
Vice President, Sub-Saharan Africa Economist, Renaissance Capital (RenCap), Yvonne Mhango, strongly believes that the autonomy of the CBN should not be tampered with.

Mhango, who spoke in an interview, explained: “Generally, we (RenCap) think all central banks across the world, not just the CBN, should be independent so that they are not influenced in terms of policy direction.

“You have the government that has the treasury under their management and controls fiscal policy. Fiscal policy in Africa is a stronger policy tool than the monetary policy and the reason is because monetary policy is a blunt instrument. This is because the transmission mechanism between the financial market and the real economy is very weak.

“So, the government has the fiscal policy and monetary policy should be left for the CBN which should be independent. In Africa, I don’t see why there should be significant appetite to control monetary policy,” he added.

Also, the immediate past Governor of the CBN, Prof. Chukwuma Soludo, has warned against amending the CBN Act 2007 with a view to removing its autonomy. Soludo specifically warned that any attempt to remove the autonomy of the banking sector watchdog, may lead to danger in the economy.

The economist expressed fear that such a development could hamper the effectiveness of monetary policy and the management of the macroeconomic framework of Nigeria, adding that the “the survival of the CBN, is at the heart of the survival of the Nigerian economy.”

He also decried a situation in which a disagreement with an individual could lead to the destruction of the entire institution.
Vice Chairman and Chief Executive Officer, Ancoria Investment and Securities Limited, Dr. Olusola Dada, also maintained that all over the world, central banks are independent. Dada advised that the CBN Act should not be amended such that the apex bank would be reporting to the ministry of finance, insisting that the bank ought to report directly to the Presidency.

“In this era of globalisation, Nigeria cannot afford not to follow the global trend. A truly independent and autonomous CBN has become more imperative for the integration of our financial system with the world economy in general and the West African sub region in particular.

“What is required now is not to erode the financial autonomy of the CBN but rather to build and strengthen relationships that would enhance complementary role between the monetary and the fiscal authorities, and ensure accountability and transparency,” he added.

Chairman of the Federal Reserve, Ben S. Bernanke, had at the Institute for Monetary and Economic Studies International Conference, Tokyo, Japan in May 25, 2010, in a paper titled: ‘Central Bank Independence, Transparency, and Accountability,’ advocated unconditional independence for central banks.

Bernanke argued: “To achieve both price stability and maximum sustainable employment, monetary policy makers must attempt to guide the economy over time toward a growth rate consistent with the expansion in its underlying productive capacity. Because monetary policy works with lags that can be substantial, achieving this objective requires that monetary policymakers take a longer-term perspective when making their decisions.

“Policy makers in an independent central bank, with a mandate to achieve the best possible economic outcomes in the longer term, are best able to take such a perspective. In contrast, policy makers in a central bank subject to short-term political influence may face pressures to over stimulate the economy to achieve short-term output and employment gains that exceed the economy's underlying potential,” he explained.

Continuing, he said: “Such gains may be popular at first, and thus helpful in an election campaign, but they are not sustainable and soon evaporate, leaving behind only inflationary pressures that worsen the economy's longer-term prospects. Thus, political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation.

“Undue political influence on monetary policy decisions can also impair the inflation-fighting credibility of the central bank, resulting in higher average inflation and, consequently, a less-productive economy.

“Central banks regularly commit to maintain low inflation in the longer term; if such a promise is viewed as credible by the public, then it will tend to be self-fulfilling, as inflation expectations will be low and households and firms will temper their demands for higher wages and prices,” he added

By Obinna Chima