In the evolving landscape of global finance, the independence of central banks is sacrosanct, forming the cornerstone upon which monetary stability rests.
However, recent amendments proposed to the Central Bank of Nigeria (CBN) Act raise substantial concerns about the erosion of this critical independence.
These changes, spearheaded by Senator Mukhail Adetokunbo Abiru and supported by all 41 members of the Senate Committee on Banking, Insurance, and Other Financial Institutions, aim to amend the 2007 CBN Act.
While some proposed changes seek to enhance governance, others could significantly undermine the CBN’s autonomy, risking Nigeria’s alignment with global economic practices.
Perhaps the major reason behind these amendments stems from the tenure of former CBN Governor, Godwin Emefiele.
Under his leadership, the CBN’s powers expanded to unprecedented levels, with the bank extensively intervening in the economy.
Emefiele’s tenure saw the CBN providing substantial loans to the government via Ways and Means and extending credit to states, actions that portrayed immense power.
However, this expansion of authority was not a unilateral overreach but a reflection of the government’s approval and alignment with his actions, supported by the president at the time.
Now, in response to this perceived period of overreach, there is a drive to curtail the CBN’s powers through legislative amendments. Yet, these amendments risk overcorrecting and eroding the bank’s independence, which is crucial for effective monetary policy and economic resilience.
Coordinating Committee for Monetary and Fiscal Policies
One of the most contentious changes proposed in the bill is the introduction of a Coordinating Committee for Monetary and Fiscal Policies, chaired by the Minister of Finance.
This committee, tasked with setting internally consistent monetary and fiscal policy targets, directly threatens the CBN’s independence.
While coordination between monetary and fiscal policies sounds beneficial in theory, the practical implications suggest a scenario where fiscal policy concerns overshadow the central bank’s mandate to ensure price stability.
Consider a situation where the government, facing a budget deficit, decides to increase public spending to stimulate the economy.
The Coordinating Committee, dominated by fiscal authorities, might push for accommodating monetary policies, such as lowering interest rates or increasing the money supply, to support this spending.
While such measures might provide short-term economic relief, they could conflict with the CBN’s primary goal of controlling inflation.
The dominance of fiscal authorities within the proposed committee could lead to scenarios where the CBN is pressured to finance government deficits, risking inflationary spirals.
This undermines the essence of an independent central bank, which is to act as a counterbalance to government fiscal policies, not an enabler.
The autonomy to adjust monetary policies, such as interest rates and money supply, based solely on economic indicators and not political agendas, is critical for maintaining economic stability.
Political Interference and Operational Autonomy
Another proposal that raises red flags is the requirement for the CBN’s budget to gain legislative approval.
This introduces a significant risk of political interference, as legislators driven by short-term political agendas may exert undue influence over the central bank’s financial decisions.
Budgetary control by the National Assembly could lead to delays in the approval process, hindering the CBN’s ability to implement timely interventions, and potentially exacerbating economic crises rather than mitigating them.
Beyond the risk of delays, requiring legislative approval for the CBN’s budget undermines the bank’s operational autonomy.
Monetary policy decisions must be based on economic conditions and technical assessments rather than political considerations. If legislators control the CBN’s budget, there is a risk that monetary policy could become politicized, with decisions swayed by political expediency rather than economic necessity.
For instance, in times of economic downturn, the CBN may need to implement expansionary monetary policies, such as reducing interest rates or increasing money supply.
However, if the National Assembly prioritizes other fiscal concerns, it could restrict the CBN’s budget, limiting its ability to act effectively.
Such constraints could prevent the CBN from performing its mandate of ensuring price stability and fostering economic growth.
Tenure and Governance Reforms
The proposed amendment to set a single non-renewable six-year term for the Governor and Deputy Governors aims to promote stability and reduce political influence.
This provision seeks to ensure that the central bank’s leadership is not constantly under pressure from political forces seeking reappointment.
By providing a fixed term, the leadership can focus on long-term economic strategies without the distraction of political considerations.
However, this approach has its drawbacks. A non-renewable term may inadvertently reduce long-term accountability.
As leaders approach the end of their tenure, the lack of a reappointment incentive could diminish their performance incentives.
Without the prospect of reappointment, there is a risk that the leadership might not maintain the same level of diligence and commitment towards the end of their term.
The creation of a Chief Compliance Officer (CCO), who reports directly to the Board and occasionally to the National Assembly, is another significant governance reform aimed at enhancing transparency and accountability within the CBN.
While this role is crucial for maintaining high standards of compliance, it also introduces potential risks.
The CCO’s direct reporting lines to the National Assembly could open pathways for political encroachment into the operational matters of the CBN, compromising its independence.
Interest Rate Determination
One of the most critical aspects of the proposed amendments is the involvement of the Coordinating Committee for Monetary and Fiscal Policies in setting interest rates for the CBN’s temporary advances to the Federal Government.
This proposal raises significant concerns about the dilution of the CBN’s autonomy, introducing potential conflicts of interest and undermining the objectivity of monetary policy.
Interest rates are a fundamental tool used by central banks to control inflation, manage economic growth, and stabilize the financial system.
Decisions on interest rates must be based on careful analysis of economic indicators, including inflation rates, employment levels, and economic growth projections.
Central banks, operating independently, can make these decisions based solely on economic data, free from political pressures.
The proposed amendment places the responsibility of setting interest rates for temporary advances within a committee dominated by fiscal authorities.
This structure inherently creates a conflict of interest. Fiscal authorities, focused on government financing and budgetary concerns, may prioritize short-term fiscal needs over long-term economic stability.
Globally, the independence of central banks is a well-accepted practice, underpinning economic stability.
The proposed amendments, by eroding the CBN’s powers, place Nigeria out of step with these international norms, risking diminished investor confidence and potential economic instability.
While the bill includes commendable provisions aimed at enhancing compliance and governance, the aspects that undermine the CBN’s independence are deeply troubling. An independent central bank is crucial for effective monetary policy and economic resilience.
Therefore, it is imperative that the Nigerian government reassess these proposals to ensure they do not compromise the CBN’s autonomy. Safeguarding the independence of the CBN is not just about aligning with global best practices but about securing Nigeria’s economic future.
The legislature must recognize that in the realm of economic policy, independence is not a luxury; it is a necessity.
