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Lawmakers target CBN autonomy in controversial amendment to law

Lawmakers target CBN autonomy in controversial amendment to law

 


The Nigerian Senate's proposed amendments to the Central Bank of Nigeria (CBN) Act, 2007 will introduce stricter controls on the operations of apex banks and take away their most valuable possession, its independence.

A diverse group of Nigerian economists and business leaders, including the International Monetary Fund (IMF), have criticized the aspect of the amendment that places monetary policy decisions in the hands of the finance minister.

The amendment bill proposes the creation of a Monetary and Fiscal Policy Coordination Committee chaired by the Minister of Finance.

The committee will strip the CBN of its power to determine interest rates, thereby preventing the bank from achieving its core mandate of price stability.

The envisaged Monetary and Fiscal Policy Coordination Committee, chaired by the Minister of Finance, could undermine the autonomy of the CBN and its Monetary Policy Committee, which is separately chaired by the CBN Governor, the CBN noted. International Monetary Fund (IMF) in its latest report. Report under Article IV.

The committee will undermine the CBN's ability to independently set rates based on economic conditions, which could lead to sub-optimal policy decisions prioritizing fiscal needs over inflation control and economic stability .

The CBN needs all the investor confidence it can get right now, after almost a decade in which unorthodox monetary policies eroded confidence.

Read also: EXPLANER: Here are the objectives of the bills to amend the CBN Act

An independent central bank is an accepted practice around the world, and countries without a central bank never really gain the trust of investors, a foreign fund manager said.

Central bank independence is the cornerstone of sound monetary policy and economic stability, the South Africa-based fund manager said.

The experiences of Argentina, Turkey, Venezuela and Zimbabwe show the harmful effects of politically influenced central banks.

Argentina's central bank, Banco Central de la Repblica Argentina (BCRA), has always been influenced by the country's political leaders. This lack of independence has led to chronic inflation, currency devaluation and repeated economic crises.

Turkey is another example of a situation where the independence of the central bank is compromised. President Recep Tayyip Erdogan has exercised considerable influence over the Central Bank of the Republic of Turkey (CBRT), often dictating interest rate policies contrary to economic recommendations.

Erdoan's unorthodox view that high interest rates cause inflation has led to repeated interest rate cuts, even amid rising inflation.

This political divergence has exacerbated inflation, which reached 68.5 percent in March, according to the latest official data.

Venezuela's central bank, Banco Central de Venezuela (BCV), is another example of a central bank subject to strict government control. The country's economic policies, driven by political agendas, led to one of the most severe episodes of hyperinflation in history.

BCV's massive printing of money to finance public spending has led to hyperinflation, with rates peaking at over 1,000,000% in 2018.

The bolvar became virtually worthless, necessitating multiple redenominations and a parallel monetary system for transactions.

The central bank's lack of independence contributed to the collapse of the Venezuelan economy, leading to widespread poverty, food shortages and mass emigration.

These cases highlight the need for central banks to operate independently to ensure sound monetary policy, control inflation and maintain economic stability.

Analysts say countries seeking sustainable economic growth should prioritize the independence of their central banking institutions, learning from the negative outcomes seen in countries where this independence is compromised.

Led by Senator Mukhail Adetokunbo Abiru, the bill sets strict interest rate measures, limits Ways and Means advances to 10 percent of government revenues from the previous three years (compared to 5 percent of previous year as is currently the case) and requires reimbursement within 12 months.

The bill also seeks to introduce a 21-year jail term for violation of Section 38 of the CBN Act, reflecting a strong stance against financial misconduct.

This amendment comes at a time when a former CBN governor, Godwin Emefiele, whose tenure is known to have violated the limits of the CBN law, is grappling with several court cases from the Economic and Financial Crimes Commission (EFCC) .

The Senate Committee on Banking, Insurance and Other Financial Institutions has fixed a public hearing on the amendment bill for Thursday, May 30 at its office in Abuja.

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