Central Bank: Autonomy, Independence, and the Nigerian Economy

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1. Introduction

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A Central Bank can be defined as the national financial institution that traditionally possesses the monopoly of the issuance of legal tender money in a country; is entrusted with the custody of cash reserves of the banking system (i.e., functions as a banker to banks), and acts as a lender of last resort. It usually acts as banker and financial adviser to the government and the custodian and manager of the nation’s foreign exchange reserves. The central bank of a country is regarded as the apex regulatory institution of the financial system of that country.

Globally, governments have taken necessary measures to ensure the integration of central banking more closely into the machinery for carrying out macroeconomic policy. For many countries, a central bank plays a key role in a country’s growth and development process (Ajayi, 2006).

Theoretical studies suggest that central bank autonomy is important because it can help produce a better monetary policy. An extensive body of literature has also shown that the more independent a central bank is, the lower the inflation rate in an economy. Central bank autonomy can be defined as independence from political influence and pressures in the conduct of its functions.

The working relations between the central bank and the government can take one of three possible forms. One extreme kind of relationship is the case of complete and full independence of the central bank (Ajayi, 2006). Here, the central bank can pursue any kind of monetary policy without any interference from the government. Full independence is not advisable because monetary policy is part and parcel of overall economic policy.

The Central Bank of Nigeria (CBN) came into being on July 1, 1957, and the core mandate of the CBN as spelled out in the Central Bank Act of 1958 and Amendments (1991, 1998) include:
– Issuance of legal tender currency notes and coins in Nigeria
– Maintenance of Nigeria’s external reserves to safeguard the international value of the legal currency
– Promotion and maintenance of monetary stability and a sound and efficient financial system in Nigeria
– Acting as banker and financial adviser to the federal government
– Acting as lender of last resort.

The CBN is also charged with the responsibility of administering the Banks and Other Financial Institutions Acts (BOFIA) of 1991 as amended (1997 and 1998), with the sole aim of ensuring high standards of banking practice and financial stability through its surveillance activities as well as the promotion of an efficient payments and clearing system.

At the beginning of central banking in Nigeria, the independence of the central bank from government interference was guaranteed; there was to be no interference from the government since the administration of its affairs and business were the responsibility of the bank’s board of directors. It was only required that the bank keep the minister informed of the monetary and banking policy to be pursued with no power to delay, stop, or prevent the bank from carrying out its functions.

Theoretically, under the CBN Act, No. 7 of 2007 (Fed. Rep. of Nig. Official Gazette No.55 Vol. 94 of 1st June 2007), the Central Bank of Nigeria (CBN) enjoys statutory autonomy and independence to ensure the Bank’s effectiveness in the discharge of its mandate. Section S 1 (3) of the Act provides that “in order to facilitate the achievement of its mandate under this Act, and the Banks and Other Financial Institutions Act, and in line with the objective of promoting stability and continuity in economic management, the Bank shall be an independent body in the discharge of its functions.”

S. 6(3) of the Act states that “the Board (of Directors of the CBN) shall be responsible for (a) the consideration and approval of the annual budget of the Bank, (b) the approval of the audited and management accounts and the consideration of the management letter from the external auditors, (c) the formulation and implementation of the exchange rate policy, and (d) making recommendations to the President for the appointment of auditors in accordance with S. 49 of the Act, the provision of the necessary facilities and the rate of remuneration.”

S. 17 of the Act provides that “the Bank shall have the sole right of issuing currency notes and coins throughout Nigeria, to the exclusion of the Federal, State, or Local Governments or any person or authority.”

S.18 (a & b) of the Act states that “the Bank shall arrange for the printing of currency notes and the minting of coins; and issue, re-issue and exchange currency notes and coins at the Bank’s offices and at such agencies as it may, from time to time, establish or appoint.”

S.19 (1) (a & b) and (2) of the Act states that “the currency notes and coins issued by the Bank shall be (a) in such denominations of the naira or fractions thereof that shall be approved by the President on the recommendation of the Board, and (b) of such forms and designs and bear such devices as shall be approved by the President on the recommendation of the Board; (2) the standard weight and composition of coins issued by the Bank and the amount or remedy and variation shall be determined by the President on the recommendation of the Board.”

S. 49 (1 & 2) states that “the accounts of the Bank shall be audited by the auditor(s) appointed in accordance with the provisions of S. 6 of this Act; and (2) the Auditor-General of the Federation shall conduct an examination of the accounts of the Bank and submit a report thereon (to the NA under S. 85 of the Const.) relating to the issue, re-issue, exchange, and withdrawal of currency notes and coins by the Bank and the Bank shall provide all necessary facilities for the purpose of the examination.”

S. 51 of the Act provides that “the Board shall have power to make and alter rules and regulations for the good order and management of the Bank” and S. 52(1) of the Act provides that “neither the Fed. Govt. nor the Bank nor any officer of that Govt. or Bank shall be subject to any action, claim or demand by or liability to any person in respect of anything done or omitted to be done in good faith in pursuance or in execution of or in connection with the execution or intended execution of any power conferred upon that government, the Bank or such officer by this Act.”

According to Ogunye (2012), the rule of law, as formulated in several decided cases on the interpretation of provisions of statutes, is that the provisions of a statute are not read in isolation of one another but construed together in order to bring out the intendment of the lawgiver. And so, the above sections of the Act must be read together with Sections 8 and 50 of the Act.

S.8(4) of the Act provides that “the Governor (of the CBN) shall appear before the NA at semi-annual hearings as specified in subsection 5 regarding: (a) effort, activities, objectives, and plans of the Board with monetary policy, and (b) economic development and prospects for the future described in the report required in subsection 5(b) of this Section.

S. 8(5) of the Act provides that “the Governor (of the CBN) shall from time to time (a) keep the President informed of the affairs of the Bank, including a report on its budget, and (b) make a formal report and presentation on the activities of the Bank and the performance of the economy to the relevant committees of the NA.”

S. 50 (1-2) of the Act provides that “the Bank shall, within two months after the close of each financial year, transmit to the NA and the President a copy of its annual accounts certified by the auditor; and a report required to be submitted to the NA and the President shall be copied by the Bank in such manner as the Governor may direct.

The issue of central bank autonomy has been a long-standing debate dating back to 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 duty 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.

Although in some empirical works it is seen that central bank autonomy does not affect unemployment, real interest rate, the level of economic growth, and revenue variability, over time, there has been a consensus in theoretical and empirical literature, and also an agreement among academic economists and central bankers, that achieving and maintaining long-run price stability is the unique goal of monetary policy, which is important for reducing inflation. Thus, it follows that the institutional arrangement through which this can be achieved has become critical. There is also 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.

The Central Bank of Nigeria has had a checkered 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. Again, the autonomy was gradually eroded until 1999 when administrative and instrument autonomy was granted to the Bank to shield it from political pressures in the implementation of policy.

This study mainly seeks to critically evaluate the effect of the removal of Central Bank autonomy on the Nigerian economy. Other objectives of the study include the following: to analyze the different types of autonom

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