There are concerns among experts that the proposed amendments to the Central Bank of Nigeria (CBN) Act of 2007 will strip the CBN of its power to determine interest rates, limiting the bank from achieving its primary mandate of price stability.
The Senate Committee on Banking, Insurance and other Financial Institutions has fixed a public hearing on the amendment bill for Thursday, May 30 in Abuja.
Analysts, including the International Monetary Fund, have expressed concern that the move by the Nigerian Senate aims to introduce stricter controls over the apex bank’s operations as well as take away its most-prized possession — its independence.
The Senate, however, argues that the bill seeks to amend the Central Bank of Nigeria Act to address the changing dynamics of the financial services industry and to enhance monetary policy, ensure financial stability and foster a regulatory environment conducive to sustainable economic growth as well as align the country’s regulatory framework with global best practices for the continued resilience of the financial services industry.
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The amendment bill proposes the establishment of a Coordinating Committee for Monetary and Fiscal policies to be chaired by the Minister of Finance.
The committee, it is feared, will strip the CBN of its power to determine interest rates, limiting the bank from achieving its primary mandate of price stability.
Spearheaded by Senator Mukhail Adetokunbo Abiru, the bill sets stringent measures for interest rates, limits Ways & Means advances to 10 per cent of the government’s previous three years’ revenue (versus five per cent of the previous year as currently obtains) and mandates repayment within 12 months.
The bill also seeks to introduce a 21-year imprisonment penalty for breaching Section 38 of the CBN Act, reflecting a strong stance against financial misconduct.
Central bank autonomy is a global best practice
Experts who spoke to Daily Trust said the issue of central bank autonomy is as old as central banking and the debate is a continuous one, particularly in the present circumstance of the Central Bank of Nigeria’s history.
They said central bank autonomy is often discussed in the context of the functions it performs. Some of the functions are statutory, non-statutory and developmental.
As the principal public sector agency charged with the execution of a country’s monetary policy, it is almost always under economic and political pressure to emphasize some goals at the expense of others in the formulation and conduct of monetary policy, they argued.
“The extent to which the Central Bank accommodates this pressure can depend greatly on its institutional independence.
“The experiences of Argentina, Turkey, Venezuela, and Zimbabwe show the detrimental effects of politically influenced central banks.
“Argentina’s central bank, the Banco Central de la República Argentina (BCRA), has a history of being influenced by the country’s political leaders. This lack of independence has led to chronic inflation, currency devaluation, and repeated economic crises.
“Turkey provides another example where central bank independence is compromised. President Recep Tayyip Erdogan has exerted significant influence over the Central Bank of the Republic of Turkey (CBRT), often dictating interest rate policies contrary to economic recommendations.
“This policy divergence has exacerbated inflation, which hit 68.5 per cent in March, according to latest official data,’’ one of the experts who wanted to be anonymous said.
Venezuela’s central bank, the Banco Central de Venezuela (BCV), is another example of a central bank under tight government control. The BCV’s extensive money printing to finance government spending has resulted in hyperinflation, with rates peaking at over 1,000,000 per cent in 2018.
IMF warns against weakening CBN’s autonomy
The International Monetary Fund has also warned the Nigerian government against the ongoing attempts to weaken the autonomy of the Central Bank of Nigeria (CBN).
The IMF issued the warning in a report of its latest executive board, highlighting points of discussion and recommendations with Nigerian officials.
“There is a risk that ongoing work by members of the legislature to amend the CBN Act could weaken the central bank’s governance and autonomy,” IMF said in the report.
It added, “Several elements in the current draft bill as disclosed in the public domain would, if enacted, significantly weaken the institutional framework and its independence, e.g., the envisaged ‘Coordinating Committee for Monetary and Fiscal Policies’ chaired by the Minister of Finance, could undermine the autonomy of the CBN and its Monetary Policy Committee, which is separately chaired by the governor of the CBN.”
Move will breed conflict of interest – Ex-CBN staff
Some serving and former CBN officials who prefer anonymity said eroding the powers of the Central Bank of Nigeria will put the government (and legislature) in bad light and not in tune with global economic trends.
They noted that some of the proposed amendments to the CBN Act are commendable as they are designed to entrench the culture of compliance, strengthen corporate governance, and reposition the bank for improved performance in attaining its mandate.
They said some of the major proposed amendments to the act appear to erode the bank’s autonomy and weaken the independence of monetary policy, which is at variance with international best practices.
They expressed concern that the proposed amendment will promote undue political interference in purely economic matters, as the fiscal authority would dominate the proposed committee’s membership and chairmanship.
They argued that the inclusion of the Coordinating Committee for Monetary and Fiscal Policies in determining the rates of interest on the bank’s temporary advances to the federal government will not only erode the bank’s operational autonomy but also breed conflict of interests since the committee is chaired by the minister and dominated by fiscal actors.
They also noted that subjecting the CBN’s budget to National Assembly approval undermines its institutional autonomy and introduces the potential for political interference in monetary policy. This could lead to significant delays in monetary policy implementation and hinder swift monetary policy responses with potential negative implications for macroeconomic stability.
Amendment will send negative signals to investors -Experts
The financial experts noted that the move to whittle the independence of the CBN may send negative signals to investors, adding that having an independent central bank remains the accepted practice across all major world economies.
Muda Yusuf, an economist and chief executive officer of the Centre for the Promotion of Private Enterprise said: “The CBN deserves its autonomy to shield it from undue interference from its activities. Too much interference will affect the quality of the economic policies emerging from the CBN as well as its personnel.”
He explained that the independence enjoyed by the central bank is part of the reasons why investors are confident in positioning their businesses in the country, stressing that the problem is not really about the law but those that would be appointed to occupy certain positions after the amendment.
Citing the gross violations of the act under the former governor of the CBN, Godwin Emefiele, the CPPE boss said if the laws are not rightly amended, the apex bank could easily be compromised.
“Whether the law is from the National Assembly or the Judiciary, once the CBN is compromised, a lot of things will go wrong,” he said.
Adeola Adenikinju, a professor of Economics and President of the Nigeria Economic Society (NES) said the amendment of the 2007 Act will potentially erode the CBN’s independence, which could be detrimental to the nation’s economy.
“I have no doubt that the review of the CBN Act 2007 by the National Assembly will weaken the independence of the central bank.
“The central bank won’t be able to play effective monetary policy roles, even investors who contribute to the economy want to ensure that the central bank has the autonomy to make certain monetary decisions,” he added.
The University of Ibadan don said while the review is aimed at promoting transparency within the country’s apex bank, it will create more harm than good.
Adenikinju stressed that the focus should be around the total implementation of the 2007 Act rather than reviewing it.
Also writing on the issue recently, Prof. Joseph Nnanna, Chief Economist at Development Bank of Nigeria said: “Despite the current state of economic turmoil, I still believe the independence of central banks globally is of paramount importance in the pursuit of long-term economic performance and sustainability.”
He said empirical evidence gathered 1980 – 2011 highlighted a superior economic performance when the central bank was granted semi-autonomy under the CBN act of (1999) and full autonomy under the CBN Act of 2007.
However, the Special Adviser to the Chairman Senate Committee on Banking, Insurance and other Financial Institutions, Prof Uche Uwaleke, denied that the amendment is aimed to whittle down the independence of the CBN.
“The fact is that the amendment bill proposes a Coordinating Committee as an institutional framework the alignment of fiscal and monetary policies. Its aim is neither to usurp the role of the Monetary Policy Committee of the bank nor weaken the instrument of the independence of the CBN,’’ he said.
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