2007 CBN Act Amendment: Analysts concerned about erosion of independence

2007 CBN Act Amendment: Analysts concerned about erosion of independence

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THE proposed amendments to the Central Bank of Nigeria (CBN) Act of 2007 aim to enforce stricter financial discipline and improve coordination between fiscal and monetary policies.

However, they also undermine the CBN’s independence and effectiveness, analysts have said.

According to finance and economic experts from Cowry Assets Management Limited, historical examples from countries like Zimbabwe, Venezuela, Argentina, and Turkey demonstrate that political interference in central bank operations can lead to severe economic instability, inflation, and loss of market confidence.

Nigerian lawmakers seek to curtail the CBN’s ability to make independent and robust decisions. The proposed amendments aim to introduce stricter measures on interest rates and limit the ‘ways and means’ advances to 10% of the government’s average revenue from the previous three years, with a mandate for repayment within twelve months. The overarching goal of these changes is to enhance the CBN’s ability to achieve its primary objectives of price stability and economic growth.

The proposed bill, titled ‘A Bill for an Act to Amend the Central Bank of Nigeria Act No. 7 of 2007’, seeks to overhaul Section 38 of the Principal Act by imposing stringent regulations on the temporary advances granted by the CBN to the Federal Government. According to the amendment, any person or group found breaching the provisions of this section would be guilty of an offense, liable to refund any amount exceeding the set limits, and face a minimum imprisonment of 21 years without the option of a fine.

In addition, lawmakers are advocating for the establishment of a Coordinating Committee for Monetary and Fiscal Policies, to be chaired by the Minister of Finance. Analysts explain that this committee would effectively strip the CBN of its power to determine interest rates, thereby limiting the bank’s ability to achieve its primary mandate of price stability using its monetary policy tools, tailored to prevailing economic conditions.

“This shift is likely to result in a politically influenced central bank, which could lead to suboptimal policy decisions. There is a significant risk that fiscal priorities might overshadow crucial aspects such as price and exchange rate stability and overall economic stability. Historical precedents underscore the potential consequences of such a move,” the analysts stated in an e-mailed note.In Turkey, for example, the central bank’s independence was compromised for political reasons, contrary to economic recommendations, resulting in inflation soaring above 65%, according to recent data.

Similarly, in Argentina, political interference in the central bank’s independence led to chronic inflation at a historic high in 2018, alongside steep currency devaluation and repeated economic crises.

Cowry Assets Management Limited recognized potential advantages of the proposed amendments, which include improved coordination between fiscal and monetary policies. By establishing a Coordinating Committee, the government may achieve a more unified economic strategy, enabling more effective targeting of policies to address specific economic challenges. Stricter financial discipline could also be a positive outcome, with the limitation on advances likely to reduce the risk of excessive government borrowing and inflation.

“The stringent penalties for breaches, including imprisonment without the option of a fine, could promote accountability and deter fiscal irresponsibility,” the firm’s analysts stated.

However, the disadvantages are considerable. “The erosion of the CBN’s independence poses a significant risk to its credibility and effectiveness. Independent central banks are often viewed as guarantors of economic stability, and political interference could undermine market confidence, leading to increased volatility and potential capital flight. The loss of independence may also result in imbalanced policies, with fiscal priorities potentially taking precedence over crucial monetary objectives like price and exchange rate stability,” the analysts further observed.

The International Monetary Fund, in its May 2024 Article IV consultation in Nigeria, noted that “At present, the CBN lacks full operational independence and primacy of price stability. The lack of hierarchy among CBN objectives as well as government representatives on the Board of Directors and possibly the MPC as stated in the 2007 CBN Act hampers the effectiveness of monetary policy operation and makes accountability to the public ambiguous. The 2007 CBN Act needs to be modernized as recommended by the 2021 Safeguards Assessment, to enshrine the primacy of price stability, strengthen central bank autonomy and governance arrangements. There is heavy reliance on monetary financing of the fiscal deficit.”

The Cowry Assets Management analysts aligned with the IMF’s position that financial autonomy should be safeguarded through, among other measures, clear and enforced statutory limits on credit to government, enhancement of profit retention rules, and prohibition of quasi-fiscal operations, with the CBN’s strict compliance with laws and regulations. The amendments include capping the “ways and means” advances to 10% of the government’s previous three years’ revenue and establishing a Coordinating Committee for Monetary and Fiscal Policies chaired by the Minister of Finance.

“While these changes could lead to more cohesive economic strategies and better-targeted policies, they also undermine the CBN’s independence and effectiveness. Historical examples from countries like Zimbabwe, Venezuela, Argentina, and Turkey demonstrate that political interference in central bank operations can lead to severe economic instability, inflation, and loss of market confidence. In our view, the overall impact of these amendments will depend on how the new authority exercises its power, balancing short-term political objectives with long-term economic health. The trade-off involves gaining greater governmental control and accountability at the potential cost of diminished market confidence and reduced monetary policy effectiveness,” the firm noted. Similarly, Mr. Olufemi Modupe Awoyemi, Founder and Chairman of Proshare Limited, Nigeria’s foremost financial information hub, believes that the Monetary Policy Committee (MPC) should determine rates and that the independence of the CBN should be preserved. According to him, in the proposed amendments, “Ways & Means limit is obscure. Does it refer to 10% of the cumulative 3-year revenue of the Federal Government or a 3-year average revenue? Who would be jailed for breaching the Ways & Means rule? There is obvious soft thinking with respect to the proposed CBN Amendment Bill. The lack of technical depth of thought needed to guide legislation is astonishing. We seem to be in the twilight of sound reasoning, and have given up governance to a merry band of political marauders keen to be seen and heard rather than respected,” Awoyemi wrote on his Company’s X handle.

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