The imperative of CBN’s autonomy

Under globalization and multi-cultural settings such as ours, Nigerians are under no illusion to the enormity of the myriad of challenges confronting the President Bola Tinubu Administration. In my opinion, anxiety and trepidation seems to trial the move by the National Assembly, to amend the provisions of the CBN Act of 2007. Industry watchers and members of the banking community fear that the attempt to amend the Act will erode confidence in the apex bank, have a negative impact on the banking industry and ultimately, affect the nation’s economy.

In the dynamic landscape of global economics, the independence of central banks stands as a cornerstone for maintaining sound macroeconomic stability and fostering confidence in financial markets. Across all major world economies, from the United States of America, United Kingdom, the developed Asian economies to the European Union, this principle is upheld as a vital aspect of prudent economic management. However, recent proposed amendments to the Central Bank of Nigeria (CBN) Act by the Senate threaten to erode this independence or autonomy, putting Nigeria at odds with global best practices and jeopardising its economic stability going forward.

It is crucial that we fully understand and appreciate the significance of maintaining the Central Bank’s independence. An independent central bank is critical for ensuring that monetary policy is conducted without political interference. This autonomy allows central banks to implement policies that focus on long-term economic health, such as controlling inflation, stabilising the currency, and promoting sustainable economic growth. In major economies, central bank independence has been instrumental in achieving these goals. The Federal Reserve in the United States, the European Central Bank, and the Bank of England all operate independently of their respective governments, ensuring that monetary policy decisions are based on available economic data and analysis rather than political whims.

While commendably the idea of the proposed amendments to the CBN Act aim to enhance compliance and strengthen corporate governance, some of the key aspects pose significant threats to the bank’s autonomy. One of such proposal is the creation of a Coordinating Committee for Monetary and Fiscal Policies. This committee, dominated by fiscal authorities including the Ministry of Finance, would have a considerable influence on monetary policy decisions. Such an arrangement risks subordinating monetary policy to fiscal objectives, undermining the CBN’s ability to achieve its primary mandate of price stability in the economy. Apparently, this is a step in the wrong direction in the management of the Nigerian economy.

Fiscal policy, which is the cardinal responsibility or primary function of the Ministry of Finance, encompasses a range of activities related to government spending and taxation. This policy area involves the allocation of government resources, management of public funds, and implementation of tax regulations, all aimed at influencing the country’s economic conditions positively. While the effective coordination between fiscal and monetary policy is desirable, giving fiscal authorities dominance over the CBN compromises the bank’s ability to act independently. This fiscal dominance could lead to short-term policy decisions that prioritise immediate fiscal needs over long-term economic stability. For instance, the government might pressure the CBN to keep interest rates artificially low to reduce borrowing costs, even if such a policy could lead to higher inflation and other economic vulnerabilities.

Another alarming aspect of the current amendment process pertains to the insistence on subjecting the Central Bank of Nigeria’s yearly budget to approval by the National Assembly. This proposed measure raises significant apprehensions regarding the potential politicisation and interference in the operations of the Central Bank of Nigeria. The approval process could result in undue delays of monetary policy decisions, hindering the CBN’s ability to respond swiftly and effectively to economic challenges. In an environment where rapid decision-making is often essential, this could prove detrimental to Nigeria’s economic health.

Global best practices emphasize the need for central bank independence to ensure economic stability and investor confidence. Across the world today, major and emerging economies adopt this framework to ensure a situation of a more stable and predictable economic environments. For Nigeria to diverge from this path would not only isolate it from the global business community but also undermine investor confidence, leading to potential capital flight, increased borrowing costs from multilateral institutions, and a general loss of economic credibility as well as downward grading by global rating organisations.

The proposed amendments, particularly the inclusion of the Coordinating Committee for Monetary and Fiscal Policies, represent a concerning shift towards fiscal dominance. This committee’s role in determining interest rates on the CBN’s temporary advances to the federal government is especially problematic. With the committee chaired by the Minister of Finance as proposed in the current amendment and ostensibly dominated by fiscal authorities, there is a clear conflict of interest. Such a structure inherently favours fiscal objectives over monetary prudence, jeopardising the delicate balance and the thin line required for sound macroeconomic management. The CBN should rather be encouraged to foster effective prudential guidelines in management of its advances to the federal government as enshrined in the current Act.

The potential for political interference in the CBN’s operations extends beyond the management of the monetary policy. It threatens the very fabric of Nigeria’s economic governance. An autonomous central bank acts as a check on government excesses, ensuring that fiscal policy does not compromise long-term economic stability. By undermining the institutional and operational autonomy, the proposed amendments risk eroding this safeguard and shield, potentially leading to economic policies driven by political rather than economic considerations.

While the Nigerian Senate’s intentions to amend the CBN Act may stem from a desire to enhance governance and performance by the apex bank, the proposed measures threaten to undermine the very foundation of effective economic management. Eroding the CBN’s autonomy not only contradicts global best practices but also risks plunging Nigeria into a cycle of political interference and economic quagmire.

Dr. Modibbo is an Abuja based journalist

It is, therefore, imperative that the Senate reconsiders some key aspects of these amendments as enunciated here, preserving the CBN’s independence as a cornerstone of Nigeria’s economic policy framework. Only by doing so can Nigeria ensure a stable, predictable, and resilient economic future, in line with global standards and best practices. The nation’s economic health and international standing depend on it.

While admitting 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 apex bank for improved performance in attaining its mandate, most analysts however, say some of the major proposed amendments to the CBN Act appear to erode the bank’s autonomy and weaken the independence of monetary policy, at variance with international best practices.

For example, the proposed coordinating committee for monetary and fiscal policies concerning monetary policy in their opinion will undermine the apex bank’s independence and capacity in achieving its price stability mandate, including fiscal and monetary policy coordination as well as undermining the CBN’s operational independence and weaken the apex bank’s flexibility in deploying appropriate policy frameworks in a dynamic economic environment to achieving its core mandate.

Similarly, 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. Subjecting the CBN’s budget to National Assembly approval will also undermine its institutional autonomy and introduce the potential for political interference in monetary policy which could lead to significant delays in monetary policy implementation and hinder swift monetary policy responses with potential negative implications for macro-economic stability.

It goes without saying that safeguarding the independence of the Central Bank of Nigeria is crucial for maintaining the country’s overall economic stability and fostering investor confidence with a good mix of monetary policy tools. The proposed amendments to the CBN Act, particularly those that threaten the bank’s autonomy, must be reconsidered to ensure Nigeria’s economic future remains secure and safe. The Nigerian Senate must be careful not to exacerbate the current economic woes in the country. Hence, by upholding the principle of central bank independence, Nigeria can align itself with global best practices and ensure a stable and prosperous economic environment for its citizens now and in the future.