By Senator JKN Waku
1. The Central Bank of Nigeria (CBN), like most others, has the core mandate of maintaining price stability and ensuring a non-inflationary growth. It also has the responsibility to ensure a sound and stable financial system in addition to other developmental functions. These mandates and functions are peculiar to central banks all over the world, and no other institution performs such functions. These special responsibilities are enormous and have continued to pose increasing challenges to central banks, largely because developments in the domestic and international economies create more intricacies and complexities in the financial systems and the art of central banking. Indeed, the current trend of globalization exemplified by economic and monetary unions has increased the challenges to central banking. The effective discharge of these responsibilities requires that central banks be independent in the true sense of it, that is, shielded from political interferences, have administrative independence and instrument autonomy. In this short write up, this writer wishes to present issues in the administrative autonomy and budgetary independence of central banks vis-à-vis independence and autonomy and country experiences. It is my considered opinion to urge against making the Governor of the central bank subservient to a politically appointed Board Chairman as well as excluding deputy governors who are executive directors as board members, as these are against international best practices. I also urge against subjection of CBN budget to the National Assembly, if the operations/effectives of the CBN are not to be encumbered.
Issues in Central Bank independence
2. The global trend for efficient and effective central banking is a truly independent central bank with both operational and financial independence. Financial independence involves four aspects namely; the right to determine its own budget; the application of central bank specific accounting rules; clear provisions on the distribution of profits; and clearly defined financial liability for supervisory authorities. These are particularly relevant especially in not-well developed political systems like ours where central banks are most vulnerable to outside influence. A central bank would be operating under imminent danger (as under a ‘Damocles’ sword’) if it depends on government for funding or waits for government/legislative approval for its financial needs. This point is best illustrated by the recent banking crisis in Nigeria in which the CBN promptly intervened in a manner that did not rock the boat. It is clear to everyone that if the CBN had waited for parliamentary debate on its lender of last resort function before injecting money into the distressed banks, there would have certainly been a run on the system even before parliament would finish debate. Even the banks that were not in grave condition would have been affected. Depositors would lose their money on a scale that has never been witnessed in this country. Also, usually, if bankers know in advance that insolvent banks will be closed and that lobbying to keep them open will fail, they will behave more prudently, thereby reducing the likelihood of a banking crisis.
3. Central bank independence has been an age long issue. As early as 1824, David Ricardo in a paper on the establishment of a national bank had advocated full independence for central banks. Similarly an economist of great repute, Keynes, in a testimony before the 1913 Royal Commission into an Indian central bank said, “it would be desirable to preserve unimpaired authority in the executive officials of the bank whose duly it would be to take a broad and not always commercial view of policy”. Our Central Bank, if it would serve the purpose for which it was established should be insulated from commercial pressure from “made for profit” financial houses.
4. Of recent, there has been a consensus in theoretical and empirical literature on the one hand and among both academic economists and central bankers on the other, that achieving and maintaining long-run prices stability is the unique goal of monetary policy and this appears to be a panacea for reducing inflation. It then follows that institutional arrangement through which this can be achieved has become critical. There is also a widespread agreement that the most important institutional arrangement in this respect is the delegation of monetary policy to a truly independent central bank and this is predicated on the causal link between monetary policy autonomy and inflation. Needles to emphasize here that inflation, if left unchecked can bring down any economy no matter how well founded or well funded.
5. In the last couple of years, there has been growing evidence that central banks, which operate outside government control, have performed better in achieving their primary mandate. Such evidence include empirical investigations by eminent researcher like Rogoff (1985), Persson and Tabellini (1990), Cukierman (1992), Alesina and Gatti (1995), Walsh (1995), Walter and Walsh (1996), among others. Each of these works concluded that central bank independence is very important to achieve price stability. In the specific study by Cukierman, in which financial independence of central banks was investigated, 16 out of the 23 central banks surveyed determined their budget. Beside that monetary delegation leads to lower basic inflation, other motivations for central bank independence are lower inflation variability and higher and more stable economic growth.
6. In addition, there are three other basic arguments that underline the causal link between independent central bank and low inflation. Central bankers are exposed to strong political pressure to adopt lax monetary policies due to budgetary and seigniorage considerations. An independent central bank will be less subject to short-term political influences, thus, is better able to commit to long-term policies for promoting price stability. The Sergeant Wallace argument says that in a situation of fiscal dominance, monetary authorities will sooner or later be compelled to monetize the budget deficit, ultimately generating inflation. A strong and independent central bank can force the government to take measures to reduce the deficit or the volume of outstanding debt. This calls for financial independence. The time inconsistency argument is the major contribution by Rogoff (1985). Very often, monetary policy making under the influence of politicians tends to focus too much on short term considerations, which easily lead to temporary, non-sustainable outcomes (where such outcome is positive) all the expense of sustained economic growth. Politicians all over the world appear to have come to appreciate these issues and decided to remove the temptation to pursue short term gains and make their central banks independent. Our case should not be different. Indeed, the literature has outlined that one of the solutions to the problem of time inconsistency is the delegation of monetary policy to an independent authority with a longer time horizon and a greater preference for price stability.
7. Moreover, a long held view, which has received rigorous analysis (Cukierman, 1986) in recent years, is that central bank independence raises policy credibility and transparency and dampens inflation expectations.
8. Furthermore, in the area of governance of central banks, the global practice has been, and still is that the chief executive officer of the central bank chairs the Board of Directors and the Executive Directors are members of the Board of Directors. This is the practice in most countries.
9. Central banks of several countries including the US, the UK, Europe, Brazil etc, and African countries such as South Africa, Ghana, Kenya, Botswana etc, determine their budgets.
In the most recent regional integration of a wide scale, the European Union (EU), a key element in the European Monetary Union was the formation of an independent supra-national central bank. Indeed, the EU’s view on central bank independence is defined by the provisions of Article 107 of the Maastricht Treaty: “when exercising the powers and carrying out the tasks and duties conferred upon them by this Treaty and the statute of the ESCB, neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any Government of a member state or any other body. The Community institutions and bodies and the governments of the Member states undertake to respect this principle and not to seek to influence the members of the decision making bodies of the ECB and the national central banks in the performance of their tasks”. In addition, many of the transitional economies of the Eastern Europe have adopted reforms aimed at making their central banks more independent. Furthermore, the traditional practice of central bank governor presiding over the board of directors that include all the executive directors subsists across the globe including regional banking institutions such as the European Central Bank.
The CBN Case
10. The Central Bank of Nigeria has had a chequered history of autonomy since its inception in 1958, varying between autonomy and control. In the 1958 Act, the CBN was granted a measure of autonomy which gradually eroded until 1991 when the autonomy was restored. The erosion of the Bank’s autonomy between the years coincided with military interventions in politics in Nigeria. Again, the autonomy was gradually eroded until 1999 when administrative and instrument autonomy were granted to the Bank to shield it from political pressures in the implementation of policy. From the inception of the Bank, the administrative structure has been that the Governor or Deputy Governor of the CBN presided over the Board of Directors and Executive Directors or Deputy Governors had always been on the Board. This arrangement had ensured easier, smoother and faster implementation of monetary and financial policies.
11. Nigeria is a driving force in the WAMZ project. The establishment of the West African Central Bank (WACB) and the eventual take off of the Eco currency in 2015 is a very important step in the process of economic integration in the sub region. The WACB will most likely operate in the manner of the ECB and will thus, be an independent supra-national central bank along with the national central banks of member countries. This implies that any legislations or institutional arrangements in any of the member countries against central bank autonomy and budgetary independence will be a clog in the wheel of the monetary integration. Nigeria should actually be in the forefront of promoting such a stand-discouraging member interference with the operations of their central bank.
12. The central Bank of Nigeria requires full independence in the true sense of it to enable it act appropriately according to its expert and independent viewpoint. The global trends have been towards full independence for central banks. Indeed, budgetary and instrument autonomy are the reasons why most central banks are now proactive rather than reactive in the discharge of their responsibilities-central banks are able to anticipate and identify problems and unintended outcomes and respond immediately with appropriate policy actions. This is the trend all over the world-in both developed and developing countries.
13. In this era of globalization, Nigeria cannot afford not to follow the global trend. A truly independent and autonomous Central Bank of Nigeria has become more imperative for the integration of our financial system with the world economy in general and the West African sub region in particular. It should be emphasized that instrument autonomy without financial/budgetary autonomy, as obtained in other countries, is meaningless. What is required now is not to erode the financial autonomy of the Central Bank but rather to build and strengthen relationships that would enhance complementality between the monetary and the fiscal autonomies and ensure accountability and transparency dictated by policies rather than budgetary constrictions and exigencies.
14. Given our recent experience with the approval process of the Federal
Government budget and the eventual passage of the Appropriation Bill by the National Assembly, it would be disastrous for the CBN in terms of its operations and overall performance, if its annual budget gets bogged down with the usual delays that had attended the Federal Government budget. The unique responsibilities that have been bestowed on the Bank require it to act expeditiously should the need arise without recourse to the political autonomies.
15. In the light of the foregoing, it becomes imperative to caution against subjecting the CBN annual budgets to the approval process of the National Assembly so as not to encumber its operations/effectiveness, particularly in this period of fragility in the impending legislation on the West African Central Bank. In addition, a central bank governor that is subservient to a political appointee that presides over
the board of directors that excludes executive directors is counterproductive and it is against the new paradigm of making central banks truly independent.
SENATOR J.K.N. WAKU