TINKERING WITH CENTRAL BANK OF NIGERIA (CBN) ACT 2007: MARCHING
GUEST COLUMNIST BY VICTOR ODOZI
It has been reported in the news media that at the Senate Plenary held on 27th September, 2022, a bill to amend the Central Bank of Nigeria Act 2007, passed the second reading. It was also reported that the key elements of the proposed amendments were as follows: the separation of the positions of the Governor and the Chairman of the Board of Directors of the Bank, with the provision for the appointment of an outsider as Chairman; divesting the Board of the power of determining and fixing the remuneration of its members; and divesting the Board of the power of approving the Bank’s annual budget, a prerogative that would now be exercised by the National Assembly. Meanwhile, the Bill has been referred to the Senate Committee on Banking, Insurance and Other Financial Institutions for consideration and report to the Senate within 4 weeks.
These are, unarguably, rather far-reaching provisions, touching as they do, the essence of CBN’s independence, and, if passed into law, would seriously constrain its performance. It is, therefore, necessary to question the rationale or justification for the proposed changes. From media reports, the following reasons were attributed to the sponsors of the amendments: the need to separate the positions of the Governor and the Chairman of the Board ‘’as obtains in other countries of the world’’; to ‘’enable any sitting CBN Governor to focus on fiscal and monetary policies rather than politics of the institution”; and the need for a holistic amendment to ensure the protection of election materials of the Independent Electoral Commission which are usually stored in the CBN for safekeeping!
Whatever the underlying motive of the proposed amendments, it is my well-considered view that they are uncalled for and would do far more harm than good, if any at all, given the following dire consequences:
First, separating the positions of the Governor and the Chairman of the Board is a recipe for disaster as it would lead to undue rivalry, conflict of roles and ”turf wars”, undermining the harmony and esprit de corps that should characterise the relationships of members of the Board. This toxic relationship would prevail, even if the two roles are clearly delineated. The arrangement would also expose the Bank to unhealthy political interference in its affairs since there is no assurance that the new Chairman would not be a politician who is being rewarded with this lucrative position as his share of the political spoils after an election!
Second, subjecting the CBN annual budget to legislative review and approval would completely erode the criterion of budgetary autonomy, a fundamental pillar of central bank independence, with dire consequences for both the Bank and the Country. In particular, such an arrangement would not only expose the Bank to undue political influence and pressure but also lead to costly delays in carrying out the Bank’s policies, operations and supervisory activities, particularly in matters where time is of the essence. This state of affairs would have adverse consequences for the efficiency, safety and stability of the financial system.
Third, divesting the Board of the power to fix the remunerations of staff of the Bank and members of the Board would lead to undue political influence, undermine the independence of members and inevitably hurt the morale of staff, with adverse repercussions on the Bank’s performance.
Furthermore, it should be noted that the sponsors of the Bill apparently did not do their homework well and goofed by hinging the proposed appointment of an outsider as Chairman of the Board on so-called global practice which is, in fact, not the case. On the contrary, the established global norm is that the governor of the central bank is also the chairman of the board, as exemplified by the cases of the following central banks of some leading advanced and emerging counties: The Federal Reserve System of the USA; the European Central Bank; Bank of Japan; Reserve Bank of India; Bank Negara Malaysia; South African Reserve Bank; BCEAO (the Central Bank of the 8 Francophone West African States); Central Bank of Egypt; and the Bank of Ghana. The only notable exception is the Bank of England. Even then, this exception does not detract from the global practice, given that the Governor of the Bank of England is in a very formidable position vis-a-vis the Chairman of the Board. In this connection, it should be noted that while the Governor is the Chair of three powerful committees – the Monetary Policy Committee, the Financial Policy Committee and the Prudential Policy Committee – the Chairman leads the Court of the Bank, which is the governing board, of which the Governor is also a member, responsible for setting the Bank’s strategy, budget and taking key decisions on resourcing and appointments. Thus, there is no potential for role conflict or turf wars! Furthermore, the Bank of England has budgetary independence.
At this juncture, it should be noted that this is not the first time that the National Assembly is attempting to tinker with the CBN Act to erode the Bank’s independence. The following instances may be recalled. In August 2000, some members of the House Committee on Banking and Currency proposed an amendment of the CBN Act in order to subject the Bank’s domestic budget to legislative review and approval. That attempt failed. The role of the Bank was again brought under scrutiny by the same Committee in April 2001, with a view to amending the enabling law to strip it of its autonomy and there was even talk at that time about ‘’returning the CBN to Federal Ministry of Finance’’. That attempt also failed.
Meanwhile, the National Assembly came of age and recognised the need to pass the CBN Act 2007 which provides that ‘’the bank shall be an independent body in the discharge of its functions” thereby granting it institutional, operational and budgetary autonomy, consistent with established global practice.
Despite the above apparent demonstration of the dawn of wisdom on this vexed issue at the National Assembly, there was another attempt to erode the autonomy of the CBN in 2012 but the Senate dropped the plan following compelling arguments mustered by some key stakeholders in defence of maintaining the Bank’s autonomy. And now, 10 years after, there is this renewed attempt to seriously undermine the autonomy that the Bank presently enjoys and needs to discharge its mandates.
One had thought that the case for the autonomy of the CBN had since been settled because it is so compelling and consistent with the global norm. However, the unrelenting periodic episodes of attempts to amend the law to erode the Bank’s autonomy indicate that the issue is far from being settled. Hence the case for and the imperative of independence needs to be articulated and reinforced here. This is being done particularly for the guidance of members of the Senate Committee on Banking, Insurance and Other Financial Institutions as they deliberate on this Bill in the hope that they would be open to compelling arguments. This intervention is also considered necessary for the sensitisation of the general public to enable them make informed judgements on this controversial subject.
In this connection, as a point of departure, it should be noted that one of the most significant developments in central banking for over four decades now is the statutory granting of greater autonomy or independence to central banks in both developed and developing countries . This development followed the global acceleration of inflation especially in the 1970’s. Specifically, with the failure of fiscal
policy in most countries as embattled governments and vote-eyeing politicians sought to achieve their short-term gains at the expense of long-term national objectives by resorting to the security printing press, it was recognised that only central banks insulated from executive/political pressures and charged with an anti-inflation mandate that could ensure the achievement of price stability.
The case for central bank independence is based both on a sound theoretical foundation and compelling empirical evidence. For instance, it has been firmly established that there is a significant negative correlation between the average rate of inflation and central bank independence. Furthermore, there is some positive correlation between the independence of the central bank and economic performance. The cases of Germany, New Zealand, U.S.A. and Britain, come readily to mind.
In making the case for central bank independence, it is considered more appropriate to define it in terms of “instrument independence” rather than “goal/mandate independence”. While the latter implies that the central bank is free to choose its goal or mandate, the former means that after the goal or mandate had been determined by the appropriate political authority, the central bank should be free to select the appropriate instrument(s) for the achievement of that mandate. It is now generally accepted that no central bank should have mandate independence as that implies the exercise of political power. This caveat should, perhaps, serve as a note of comfort or reassurance to politicians who are rather uncomfortable with the idea of central bank independence.
However, it has to be acknowledged that concerns have emerged over the significant expansion in central banks’ mandates which could pose challenges to the independence and efficacy of monetary policy, particularly in the wake of the global financial crisis (GFC) of 2007 – 2008 and more recently with the advent of Covid-19 Pandemic. Also, critics have questioned whether the accountability arrangements remain adequate, given the financial stability objectives, and expressed concerns over monetary policy crossing the line into the fiscal sphere, thereby creating the illusion that central banks could simultaneously promote economic growth and ensure both price and financial stability.
Despite this renewed debate, the case for central bank independence remains valid and compelling. Indeed, the available literature and empirical evidence have amply demonstrated the benefits of central bank independence in achieving price stability. Furthermore, ‘’instrument independence gave central banks the flexibility and quick adaptability to develop new tools to address some of the challenges brought about by the crisis (GFC) at a time when fiscal policy was not yet responding or was constrained by sustainability concerns. Currently, while the global economy is being hit by the coronavirus (Covid-19) pandemic, most central banks have again responded quickly, using conventional tools, reintroducing and enlarging some of the unconventional instruments used during the GFC, deploying new ones, and reacting, in many instances, before national fiscal policies.’’ (B. Vonssen et. al. 2020: The case for central bank independence: A review of key issues in the international debate).
Supporting the above thesis, A.M. Salmeron, 2021, asserts: ‘’.. independence of central banks seems indisputable, even more so in these times of pandemic, in which they have increased their use of unconventional policies and provided coverage for the high funding needs of states.’’
CBN’s ongoing real-sector interventions may be put in the above context and better appreciated.
Although central bank independence is a necessary and vital factor for enhancing the effectiveness of monetary policy, it is not a sufficient condition for success. Instrument independence must be supported
by a regime of fiscal viability and responsibility. It should also be earned and sustained through a track record of competence and credible performance by the central bank.
With respect to Nigeria, the case being made here is for the Central Bank to continue to have real administrative and instrument independence as provided in the 2007 Act to enable it pursue its core mandates of price stability, effective banking supervision and financial stability. For the avoidance of doubt, it should be stressed that instrument independence is a privilege, which carries with it a responsibility for accountability to the people through periodic reports to the relevant executive/legislative authorities and external review of the Bank’s performance in discharging its statutory mandates. On this issue, it should be noted that the CBN Act 2007 has adequate provisions to hold the Bank, through its officials, accountable. For instance, Section 8, subsections (4) and (5), mandate the appearance of the Governor before the National Assembly at semi-annual hearings and make a formal report and presentation on the activities of the Bank and the performance of the economy to the relevant Committees. Also, Section 50 (1) provides that the Bank shall within two months after the close of each financial year transmit to the National Assembly and the President a copy of its audited annual accounts. These are important provisions which should be used not only by the National Assembly to ensure effective legislative oversight of the Bank’s activities but also by the Governor to render account on his stewardship and engender legislative confidence and goodwill.
Over the past 40 years, the forces of law, financial sector developments, politics and globalisation have been at work in shaping the fortunes and degree of Central Bank autonomy in Nigeria but it is also true to say that, unfortunately, political preferences and expediency have been more at work than any other factor. However, we need to recognise that the Central Bank of Nigeria, like our national currency (which it issues as one of its core mandates) and our national flag, is a symbol of our political sovereignty. As the saying goes, “New nations acquire a flag, write a national anthem and establish their central bank”. Indeed, the central bank is a high profile, integrating, professional institution whose integrity and sanctity should be inviolable. It is, therefore, hereby submitted that, in keeping with both domestic realities and global practices, the CBN needs to continue to be adequately empowered to enable it fulfill its core mandates. Above all, its autonomy should not be subjected to the vagaries of short-sighted political manipulation or expediency.
Finally, despite concerns over the Bank’s image and controversies on some of its activities, it is fair to say that, as an institution, it has done, and continues to do, well. Indeed, it remains one of our finest institutions. Instances abound in which the Bank gave sound professional advice to the authorities which was turned down without valid reasons, with adverse consequences for the economy. It is, therefore, urged that CBN Governors, as gatekeepers of the Bank, should jealously guard, and be proactive and unwavering in defending its autonomy. In this connection, they should resist any political or executive pressure on them to act against their better professional judgement or violate the provisions of the law; for instance, being obliged to monitise the fiscal deficit. They should be prepared to take politically unpopular decisions which they perceive to be in the ultimate interest of the Country. And, they should also be ready, if need be but as a matter of last resort, to resign their appointments over fundamental ethical issues and irreconcilable policy differences, in pursuit of the public good. Although such a step was an inconceivable and, indeed, risky proposition under military dictatorship, it should not now be beyond contemplation under the prevailing democratic governance. The recognition that this option exists might, in due course, mitigate the ordeal of central banking which is an occupational hazard, and make central bank independence viable in Nigeria. I am, of course, acutely aware that this prescription
might be dismissed offhand as rather fanciful and even naïve, given the Nigerian factor and the certainty that if a Governor of the Bank resigns voluntarily over policy or ethical issues, he would readily be replaced by a more cooperative and pliant but otherwise competent candidate who is ready to step into a dead man’s shoes! Indeed, for the records, it is to be noted that so far no CBN Governor has ever resigned his appointment voluntarily over irreconcilable policy differences or ethical concerns, indicating that recourse to resignation might not be a viable proposition. Nevertheless, it is a desirable prospect which when, and not if, it happens, would, perhaps, be one of the greatest developments in the governance of not only the CBN but also our Country.
Going forward, the National Assembly should recognise that it is not in our national interest to reverse the autonomy of the CBN as enshrined in the 2007 Act. What is sorely needed now is to hold the Bank, through its principal officers, accountable for the performance of its mandates, in keeping with the provisions of the enabling laws. Our distinguished Senators should resist the temptation to march backwards because that would be disastrous. The baby should not be thrown with the bath water. Let the CBN be!
Diokpa Victor Odozi
Former Deputy Governor, CBN (February 1988 – June 1999)
