Lawmakers take aim at CBN autonomy in controversial Act amendment

The Nigerian Senate’s proposed amendments to the Central Bank of Nigeria (CBN) Act of 2007 will introduce stricter controls over the apex bank’s operations as well as take its most-prized possession — its independence.

A motley crew of Nigerian economists and business leaders including the International Monetary Fund (IMF) have criticised the aspect of the amendment that places monetary policy decisions in the hands of the Minister of Finance.

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 will strip the CBN of its power to determine interest rates, limiting the bank from achieving its primary mandate of price stability.

“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,” the International Monetary Fund (IMF) noted in its latest Article IV report.

The committee will compromise the CBN’s ability to independently set rates based on economic conditions, potentially leading to suboptimal policy decisions that prioritise fiscal needs over inflation control and economic stability.

The CBN needs all the investor confidence it can get at the moment after nearly a decade in which unorthodox monetary policies eroded confidence.

Read also: EXPLAINER: Here are what bills to amend CBN Act seek to achieve

“An independent central bank is the accepted practice the world over, countries without it never really earn the trust of investors,” one foreign fund manager said.

“The independence of central banks is a cornerstone of sound monetary policy and economic stability,” the fund manager, based in South Africa, said.

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.

Erdoğan’s unorthodox view that high interest rates cause inflation has led to repeated cuts in interest rates even amid rising inflation.

This policy divergence has exacerbated inflation, which hit 68.5 percent in March, according to latest official data.

Venezuela’s central bank, the Banco Central de Venezuela (BCV), is another example of a central bank under tight government control. The country’s economic policies, driven by political agendas, have led to one of the most severe hyperinflation episodes in history.

The BCV’s extensive money printing to finance government spending has resulted in hyperinflation, with rates peaking at over 1,000,000% in 2018.

The bolívar has become virtually worthless, necessitating multiple redenominations and a parallel currency system for transactions.

The lack of central bank independence has contributed to the collapse of Venezuela’s economy, leading to widespread poverty, food shortages, and mass emigration.

These cases highlight the necessity for central banks to operate independently to ensure sound monetary policy, control inflation, and maintain economic stability.

Analysts are of the view that countries seeking sustainable economic growth should prioritise the independence of their central banking institutions, learning from the adverse outcomes observed in nations where such independence is compromised.

Spearheaded by Senator Mukhail Adetokunbo Abiru, the bill sets stringent measures for interest rates, limits Ways & Means advances to 10 percent of the government’s previous three years’ revenue (versus 5 percent 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.

This amendment comes at a time when a former CBN governor, Godwin Emefiele, whose tenure is known for breaching the CBN Act limit, is battling several court cases from the Economic and Financial Crimes Commission (EFCC).

The senate committee on banking, insurance and other financial institutions has fixed a public hearing on the amendment bill for Thursday, May 30 in their Abuja office.