Monetary policy autonomy as strategic imperative for new economic order
The history of the evolution and development of the Central Bank of Nigeria (CBN) can be as disruptive and as interesting as the country’s political economy itself.
Right from July 1, 1959 when the Act establishing CBN was implemented , the desire for an independent and professional institution that would meet the development aspirations of a nascent post- colonial economy with necessary financial muscles to oil the wheels of development in various segments of economy remained a focal point for its managers.
The Central Bank Act, of 1958 (as amended) and the Banking Decree 1969 (as amended) constituted the legal framework within which the CBN operates and regulates banks in the country.
But despite the disruptive tendencies of the various military coups from 1966 including the ugly realities of a three -year civil war, with the characteristic regimes of a “potentate” (then the military)up until 2007 when the The CBN Act, 2007 was enacted, there had been no disputing the clarion need for an apex bank that is structurally and operationally detached from the whims and capricious tendencies of politicians who were always wanting to hijack the core mandates of the central bank.
Being the authority that hires and fires executives of the apex bank , there is usually the temptation to want to have it run as an appendage of the executive arm of such government.
Consequently, the desire of the authority to exact some measure of control stems from the fact that as the lender of last resort and economic advisor to every administration /government in power, the Central Bank of Nigeria carries so much financial war-chest they need to influence and accomplish much of their infrastructural mandate in the macro economic space over a period of time.
This can be better appreciated when viewed against the N2.4trillion CBN COVID- 2019 intervention package rolled out by the now suspended Governor, Mr Godwin Emefiele in intervention programme to keep the various sectors of the economy running during the pandemic.
Going by the letters of the Act, the CBN shall be a fully autonomous body in the discharge of its functions under the law, including the Banks and Other Financial Institutions Act with the objective of promoting stability and continuity in economic management.
But in recent times however, some observers are beginning to think that some policies of government portrays the Act as largely compromised and sees the CBN as operationally not free from the whims of a powers that be.
A careful evaluation of its key functions over the years under the civil administration readily isolates several instances of willful and unintended encroachment and needless interferences by the political authority.
Reason being that the governor of the CBN and his deputies are appointed by the President to whom also they pay allegiance and must remain loyal to keep their jobs after senate approval.
Regardless of these interferences the truth is that the monetary policy direction of the bank usually does not and should not be based on the whims and caprice of the President or minister if the bank must retain its credibility and professionalism.
Monetary policy formulation stems largely from a set of technical considerations dictated by the core mandates of a central bank including price and exchange rate stability and issuance of the country’s legal tender and the lender of last resort to government and entities permitted by its enabling statutes among others which the executive arm should not be abreast of.
It can therefore be argued that the several decades of advocacy for monetary policy autonomy of the central bank does also recognise the need for harmony between the fiscal and monetary authorities basically in the overriding interest of the economy and citizens who often suffer the collateral consequences of every bad monetary policy of the central bank shouldn’t be an avenue for a romance that would derail its autonomy.
As banker to the Federal Government, the Central bank advises and collaborated with the executive arm on all key economic issues, especially with respect to inflation, taxation, export/import policies, interest and exchange rate stability and serves as lender of last resort by helping government overcome short- term financial disequilibrium pending when it sorts out its cash flow constraints.
Also Section 2b and Section 17 of the CBN Act gives the CBN the sole right to issue currency notes and coins throughout Nigeria as neither the Federal Government nor any sub national Local Government, other person or authority shall issue currency notes, banknotes or coins or any document or token payable to bearer in the country.
Central banks carry out a nation’s monetary policy and control its money supply, as it often mandated with maintaining low inflation and steady GDP growth. On a macro basis, central banks influence interest rates and participate in open market operations to control the cost of borrowing and lending throughout an economy.
But all these functions can only be effectively discharged if there is reasonable amity and understanding between the monetary and fiscal authorities. An environment devoid of mutual trust and understanding between the executive arm of government and monetary authority cannot in all conscience guarantee the objective of financial system stability, explaining why the new government of President Bola Tinubu should draw a line in its relation with the CBN to avoid an interplay of executive recklessness on monetary policy matters.
In his reaction to recent developments in the nation’s monetary framework, the Director, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, argued that there is no absolute autonomy.
According to him, “The CBN has a large degree of autonomy with regard to monetary policy management. That is in respect of the use of policy instruments to manage liquidity in the economy.
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But when the CBN begins to appropriate huge financial resources on project’s or donations, it cannot have absolute autonomy because such actions are not monetary policy actions. To an extent, such spending are fiscal activities as CBN fiscal operations should be within a budget duly approved by the National Assembly.”
He however noted that where the actions of the CBN are clearly seen to be detrimental to the economy and hurting the citizens unjustifiably, there should be a framework to check such actions.
Yusuf cited the Naira redesign policy as a good example of how the autonomy of the CBN can be abused.
He pointed out that the National Assembly has some oversight responsibility on all agencies of government in accordance with the constitution and that the CBN cannot be an exception, especially on matters outside the sphere of monetary policy.
Also contributing to the debate around the apex bank autonomy, the Chairman, Manufacturers Association of Nigeria (MAN), Apapa branch, Frank Onyebu, that the unification of the exchange rate of the Naira was a good policy of government which, though may now seem unpleasant, will ultimately benefit the economy.
He stated “The multiple exchange rate regime was riddled with a lot of corruption and benefited only a few privileged individuals. Majority of businesses, especially the SMEs, were excluded. So it was only fair that the policy was scrapped.
On the issue of independence, I think it will be difficult to achieve total independence for the CBN. There are always going to be some elements of executive interferences. What I will advocate is that the interferences should be limited to policy directions and not the daily operations of the bank.”
According to him, “what is condemnable are instances where the executive interferes with routine, day to day operations of the CBN. We’ve seen instances where the CBN issued money directly to the executive even without appropriation or where the CBN attempted to close the deficit gap by simply printing new notes. “
“I strongly recommend that candidates for CBN governor should have strong enough character to be able to play the role without being compromised,” he said.
For his part, a political economist, Dr. Nathan Owhor, observed that activities of the CBN under the leadership of the former Governor, Godwin Emefiele, has come under intense scrutiny. “But the apparent attempt to renegotiate its autonomy in the domestic economy is like throwing away the baby with the bath water. There is therefore the urgent need for caution and introspection to avoid exposing the institution to any kind of abuse in future. “
“The CBN autonomy on monetary policy is consistent with tradition and good judgement despite the now infamous Emefiele experience. The Naira redesign policy amongst others, will go down in history as his albatross. But the CBN is not Emefiele. His conduct should not be the reason to whittle the powers of an institution with a track record of guiding and regulating the economy in the past. “
“Clearly, the apex bank danced naked in the political arena leading to the 2023 general elections. The trust in the CBN as an independent regulatory agency was compromised, even though the CBN has not always behaved that way. The traditional autonomy of the CBN is therefore essential to insulate its operations from political interference. “
Owhor argued that in a fragile democracy like Nigeria, an attempt to remove the autonomy of the apex bank as a regulatory authority in the domestic economy will portend great danger for the economy.
He further urged the political leaders to only concern and limit themselves with economic policies and allow the CBN unfettered power to guide the political authority on fiscal policy frameworks.
Nigerians are no doubt favourably disposed to identifying with the renewed hope agenda of the present administration, stressing that the focus for now therefore should be to enhance the capacity of the recruitment process as the nation awaits the appointment of the next Governor of the apex bank.
Also defending the apex bank’s autonomy Mr Jolomi Odonghanro, Head, Research and strategy at Cordros Capital Limited, said
“For us, we view the CBN’s FX liberalisation as positive and so what the Federal Government has done by liaising with the CBN is to boost foreign investor’s confidence. We think investors may adopt a wait-and-see approach, for now, looking for signals on CBN’s plans for clearing the FX backlogs and boosting FX supply to support the market in the near term.
Besides, we suspect that due to the previous lessons learnt from the damaging currency controls of the prior administration, investors will be on the lookout for signs that there are no counter policies to prevent them from leaving at any point in the near term before returning to the market in their droves.
We also think government reforms and policies are expected to reap benefits in the medium-to-long term if they are maintained.
For his part, Dr Innocent Okwuosa, ICAN President stated that unification of the Nigeria foreign exchange rate is still at its early stages of implementation but has nonetheless been greeted with positive reactions from the investment and professional communities. It is expected that this action will generally lead to short-term pains that will yield long-term gains. But just as I have said and will continue saying, the country needs a new CBN governor who will provide a credible long-term direction for monetary policy. This will provide certainty and stability, and boost investor confidence to boost inflow of capital into the economy.
Going forward, we expect that monetary policy management must be discussed with the fiscal stakeholders so that we do not have the kind of disharmony between the fiscal and monetary authorities in the last 8 years.
