With the suspension of the CBN governor, Godwin Emefiele by President Bola Ahmed Tinubu, several issues with his administration of the apex bank have come to a head. These include its loans to the federal government in clear contravention of the CBN Act 2007 and its substantial loan obligations to various foreign entities, leading to several questions about its corporate governance structure. In this interview with BusinessDay’s Onyinyechi Ukegbu, Desmond Ogba, Partner at TEMPLARS discusses the impact of legislative loopholes on a nation’s economy and a possible oversight mechanism for the CBN.
1. Is the CBN Act 2007 bad legislation?
I wouldn’t go as far as saying the CBN Act is bad legislation. That would be too sweeping to be correct. The CBN Act is a significant improvement from its precursor, the 1991 statute. However, laws are products of human endeavours and as various actors in the legal and financial sectors continue to engage with, and interrogate the Act, we will find loopholes and opportunities for improvement. For instance, with the issues that have arisen from the CBN over the last years, experts have had cause to question the lack of a corporate governance framework, lack of oversight and the consistent departures by the CBN from its statutory mandates and functions. The CBN Act is 16 years old now and while that is not such a long time in the lifespan of a statute, it is worth a re-examination, in light of the recent developments and criticism of the Act.
2. How important is addressing legislative loopholes to the security and stability of the business environment?
It is absolutely important. Laws generally provide the framework within which businesses operate, and investors are usually concerned about the overall legal regime in which they want to operate. If the legal regime does not bolster confidence or if there are several loopholes in the system, investors will be wary about making any investment decisions in that economy. Issues like the security of investments; protection of stakeholders; assurances on repatriation of funds; equal treatment of investments, and certainty of tax and fiscal regimes are important things that investors typically look out for, and these are issues that laws can easily deal with. So, any gaps or uncertainty about these issues could impact investments.
If you take the Petroleum Industry Bill before it became an Act, many energy sector investors were reluctant to commit more resources to the Nigerian petroleum industry because although the bill had the potential to change the face of the entire sector, there was a lot of lethargy and uncertainty surrounding its enactment. However, with its passage recent enactment into law, there is some renewed hope for that sector, even with various local and global challenges facing the energy sector.
3. What would you say were the most significant contraventions of the CBN Act during the last administration?
Firstly, are the advances to the Federal Government. The CBN Act authorises the CBN to grant temporary advances or loans to the Federal Government in cases of deficiencies in budget or revenue. However, the Act also qualifies that by capping the total of such advances at 5% of the previous year’s actual revenue. The rationale for this is to prevent the Federal Government from over-relying on the CBN for funding instead of finding ways to open up the economy and boost direct investment. By various accounts, the CBN has exceeded this limit by multiples.
The second which is inseparable from the first, is the tenor of the loans. The Act requires that loans must be repaid as soon as possible and within the same fiscal year within which the loans were granted, and if not repaid, the CBN is not permitted to make further advances until repayment. However, by recent reports and data, the loans granted from previous years, not only exceed the limit but remain unpaid, yet the CBN continued to fund the Federal Government.
Thirdly, there is the seeming erosion of the independence of the CBN. The Act recognises that in order to promote its objectives, the CBN needs to be an independent body. But over the last few years, we saw what seemed to be a fragmentation of that independence in the way the CBN operated and related with the Federal Government and in the bold-faced attitude in which the suspended CBN Governor Emefiele attempted to venture into politics while still in office.
Lastly, there are debates around whether the manner in which the Naira redesign policy was implemented was a violation of the Act, and also whether various policy pronouncements of the CBN, particularly, with respect to the acceptance and use of foreign exchange are consistent with the Act. But the jury is still out on this.
4. How necessary is the concept of central bank autonomy?
The independence of the CBN entails the operational freedom of the CBN in carrying out its mandates and the Act recognises this in order to avoid needless external interference. The Act lists five core functions of the CBN including ensuring monetary and price stability, acting as a banker by providing economic and financial advice to the Federal Government, and issuing legal tender, among others. Considering the extent to which the government can be impacted by the discharge of those functions, the CBN needs to be autonomous in order to be critical in the execution of the mandate. Unfortunately, we have seen instances of what appears to be a voluntary submission by the CBN to the erosion of its own autonomy. Also, we have witnessed the regulatory powers of the CBN exercised in such a manner as to suggest political interference in ways that are averse to its own autonomy.
Autonomy is great to have but there should be limitations because the CBN should not operate unchecked. For one, there should be a strong corporate governance regime within the CBN itself. As the apex bank, you would think there would be clear corporate governance rules that regulate the internal operations of the bank, but those rules do not exist. Also, the CBN Board of Governors do not have powers over the CBN governor in a way that the board of a corporate company can dictate to its chairman. Again, the CBN appears to be answerable only to the President and in limited cases, the National Assembly. While these are supposed to be checks to its autonomy, in practical terms, they have not been as effective.
5. The National Assembly has been accused of being a mere rubber stamp to the whims of the executive. Section 8 of the CBN Act of 2007 gives the National Assembly oversight powers over the CBN. Do you think this provision sufficiently empowered the National Assembly?
Section 8 requires the CBN governor to appear before the National Assembly to make a formal presentation on the activities of the bank. In my estimation, this power coupled with the general oversight authority of the National Assembly under the Constitution seem broad enough.
While the section can benefit from better drafting, we must be careful to not put too much power into the hands of the National Assembly as that can be misused for political reasons. For instance, with regards to the Ways and Means Advance, the Act places a 5% cap on the previous year’s revenue on lending to the Federal government. However, members of the National Assembly have recently recommended that it should be increased to as much as 15% when seasoned economists are saying that the current excess of this limit is impacting the economy negatively in different ways. So, we have to be careful in striking a balance.
6. What is, and what is the purpose of the ways and means advance?
This refers to the various bridge financing options available to governments to meet emergency or immediate funding requirements when there is a budgetary or revenue shortfall. In Nigeria, a common avenue is through advances from the CBN.
In other climes, there are Ways and Means committees whose job is to debate various ways to help the government raise short-term funding to deal with those issues. In Nigeria, this does not exist.
7. The Federal Government is currently indebted to the CBN for 23.3 trillion as of the end of 2022. How does this affect investor outlook?
It is certainly not a good place to be because heavy reliance on central banks for government funding impacts investor confidence. It raises questions about the viability of the economy which could trigger investment downgrades by rating agencies – and that isn’t good for foreign investments and external borrowing.
Truth be told, central banks fund their governments from time to time. However, such funding is expected to be short-term and capped by reference to the government’s revenue during the period. When a central bank overlends to its government, the nation runs the risk of inflation and currency deprecation, and it slows down investments in the economy. All of these are evident in Nigeria, today. While there may be different reasons for this, some people say that it is also not unconnected to the Federal Government’s excessive borrowing from the CBN.
8. How can we ensure proper oversight of the CBN through the Act?
The only way to achieve this is to look at the CBN Act and determine what amendments need to be made to necessary sections. There is a need for proper corporate governance because it provides an exposé on the issues that may arise within the organisations and a framework for dealing with them as they arise. In this respect, the CBN Board of Governors could be properly empowered to make certain decisions relating to oversight.
From the executive point of view, the President may be too detached from the process and as such does not exercise this power as it should. Perhaps, there should be an intermediate body, an Ombudsman that looks into CBN’s activities from time to time and addresses those issues immediately before they have to be taken to the President.
From a legislative point of view, Section 8 of CBN Act and the Constitution give the National Assembly certain oversight functions but whether that combination should enable it to give directives to the CBN is debatable.
9. In addition to the above measures, how can legal and societal stakeholders act to ensure a stable economy through a stable CBN?
The challenge we have when dealing with the Central Bank is that the people who are directly pinched and best understand the issues are those directly regulated by the CBN. So if they were to speak up or do the needful, they might find themselves on the dark side of the regulator.
Civil societies, however, have more liberty to act as pressure groups and advocate for better governance. For instance, they can push for legislators to sponsor bills at the National Assembly through which relevant amendments can be made. Associations like the Nigerian Bar Association can continue to speak out when necessary. All of this put together can put pressure on the CBN to fulfil its mandate as prescribed by law.
I used to be part of a senate technical committee on financial law reforms a couple of years ago, and one of our recommendations was on how to strengthen the CBN, improve oversight and generally strengthen the system. If the current National Assembly were to go back to that report, the recommendations from the various experts involved would be useful on the way forward.
Given the lessons learned over the last few years and the roles, both famous and infamous, that the CBN governors played in recent past, it is time to put together a team of experts to look closely at the CBN Act again and make proposals for its improvements and by implication the improvement of the economy.