central bank

By Olu Fasan

RECENTLY, after reading, for the umpteenth time, about President Muhammadu Buhari’s “orders” to the Central Bank of Nigeria, CBN, I tweeted: “All this @MBuhari ‘asks’, ‘orders’, ‘directs’, ‘instructs’ the @cenbank to do this or that is doing enormous damage to the credibility of #Nigeria’s central bank.” Hundreds of people liked and retweeted the tweet, an indication that the issue generated a lot of interest. And rightly so!

The central bank is too critical an institution to be subject to political influence. As Milton Friedman, the renowned economics Nobel laureate, said, the relation between the central bank and the government is comparable to the relation between the judiciary and the government.

Just as one wouldn’t expect a president to tell a court how to decide a case, it’s anathema for a president to instruct the central bank how to discharge its mandate.

But President Buhari ignores such niceties. “I have ordered the central bank to …” is the language he has used since assuming office in 2015, despite former CBN leaders’ warning that such authoritarian language would harm the credibility of the apex bank.

In 2015, Professor Charles Soludo, former CBN governor, said in a speech that frequent reports in newspapers that “‘Presidency directs central bank to …’ got many players in the economy seriously worried”. He added that:“When the market knows or believes that the central bank is merely an extension of the Presidency and takes daily ‘directives’ from there, the Bank loses credibility.”

Nations grant independence to their central banks to safeguard their economic credibility with the market and investors. For instance, the creation of independent central banks in many former communist countries was a signal of their readiness to embrace the free market system.

Similarly, after nearly 20 years out of power,due to perception of economic incompetence, the UK Labour Party had to announce in 1997 that it would grant operational independence to the Bank of England, if elected, to win the confidence of the market.

Foreign investors would shun a country whose central bank is believed to lack operational independence over monetary and foreign exchange policies. Furthermore, where a central bank regulates other financial institutions, the integrity of the entire financial system is at risk if the bank is perceived to be prone to political influence.

Sadly, the CBN lacks both political and economic independence. It lacks political independence because it cannot determine its policy objectives without political interference. And it lacks economic independence because it is apparently taking orders from the president on how to use the policy instruments at its disposal.

For instance, the CBN could do nothing until President Buhari reluctantly agreed in 2016 to partially float the naira, even when Nigeria was experiencing massive capital flight and rapidly haemorrhaging foreign exchange due to the naira’s fixed value. President Buhari accused anyone calling for a flexible exchange rate of wanting “to kill the naira”. The CBN was in lock-step with him, legitimising the fallacy that allowing the naira to find its market value was “killing” it!

Scholars say that a central bank is independent when it has four characteristics. First, its governor is insulated from political pressures; second, the bank can make policy decisions independently of government involvement; third, its sole mission is to maintain price stability and a sound financial system; and four, there are limitations on the extent to which the bank can lend to government.

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On the four characteristics, the CBN, under the Buhari government, falls far short of being independent. In fact, it is not independent at all. I mean, Godwin Emefiele, the central bank governor, is probably the most political CBN governor in recent memory. While central bank governors tend to favour liberal policies and reforms, Emefiele does President Buhari’s bidding at every turn, supporting his statist, protectionist and interventionist policies.

What’s more, Emefiele made a shocking partisan intervention in last year’s presidential election. He publicly criticised the manifesto of former Vice President Atiku Abubakar, telling him:

“Don’t drag Nigeria back to the Structural Adjustment Programme, SAP, era.” There is hardly anywhere in the world where a central bank governor would blatantly intervene in a presidential election campaign in that way, apparently taking sides in a political contest!

Of course, by criticising Atiku’s programme of economic liberalisation and deregulation, Emefiele nailed his own colours to the mast:that he was Buhari’s ideological kindred spirit.

It is thus not surprising that, rather than market reforms, Emefiele’s central bank is pursuing a socialist agricultural policy and feeding the Buhari government’s appetite for debt by lending heavily to the government to finance its huge fiscal deficit. Being banker and financial adviser to the government is not the same thing as printing money to bankroll it!

The CBN has been somewhat independent under governments pursuing liberal economic policies. For instance, following the adoption of the SAP in 1986, General Ibrahim Babangida’s regime granted the CBN limited autonomy under Decree 24 of 1991.

But the Sani Abacha regime, which operated a closed economy, especially after becoming extremely authoritarian,enacted Decree No 4 of 1997, which removed the CBN’s limited autonomy.

Ten years later, the central bankwas granted full autonomy under the CBN Act of 2007. The act says that “the Bank shall be an independent body in the discharge of its functions”. Surely, no reasonable interpretation of those words could justify President Buhari’s “orders” to the CBNon how to discharge any of its functions.

Thus, Dr Kingsley Moghalu, former CBN deputy governor, was right to say, according to the BBC, that President Buhari’s directives contradict the law, and that the central bank’s economic policy should not be “imposed by a political authority”.

Apparently, President Buhari sees the CBN as arm of the Presidency and has no regard for its independence. But he is harming the Bank. The CBN’s credibility would be in tatters if Buhari continues to order, direct or instruct it to do anything!



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