By Chibuzo A. Efobi

Firstly, well deserved praise must be given to the steadfastness of the Centran Bank of Nigeria Governor, Prof Soludo, and his team for successfully concluding the recent recapitalisation exercise in the banking sector. Compared to previous CBN Governors, it was a very bold move and must be the first of many other equally bold steps required in reforming the financial services sector (not just banking).

Referencing Prof Soludo lecture - Update on CBN and Reforms on May 17^th 2006, it is interesting to know that reforms within the CBN itself are still on course. Of particular interest is the CBN’s movement towards inflation targeting and improved statistics for policy making. I sincerely hope that the absence of any comment(s) on how to tackle the enormous volume of cash circulating outside the regulated system was just an oversight. With a predominately cash based and import dependent economy like Nigeria, formulation and implementation of monetary policies and subsequent monitoring with available statistics will definitely be skewed (‘CBN & Monetary Policies: Impact on a cash based economy’ is another topic for the allnairapros series)

According to literature on CBN’s website, the statutory mandates derived from various Acts and Decrees 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; and
• Acting as lender of last resort to banks.

Although these statutory mandates may appear rather simple, a closer look at the bigger picture will reveal that these principles form the foundation of every successful economy if applied intelligently, proactively, diligently and without political interference. However, successful application of these basic principles will ultimately depend on:

1. level of autonomy or independence enjoyed by the Central Bank
2. regulatory environment (with emphasis on monitoring and supervision)
3. legal framework
4. fiscal policies of the government
5. align of fiscal and monetary policies
6. an accountable political class and commitment to economic and social growth

It is monetary policy that central bank independence is primarily geared towards. Institutional independence first of all refers to the central bank’s power to formulate monetary policy independently from political institutions. Moreover, it may also refer to a central bank’s freedom to set the final goals of monetary policy. This is also sometimes referred to as political or goal independence

Being the first in a series of articles relating to the role of CBN as a catalyst in Nigeria’s economic growth, we start by asking three basic questions:

a)     what is the current legal framework

b)     what is the role of a Central Bank in economic development?

c)     what are the benefits of autonomy, any correlation between economic stability/growth and an independent Central Bank?

Current Legal Framework

CBN’s legal framework since inception started with the Central Bank Act, 1958 and full operations in July 1959. Thereafter there has been:

·         Banking Decree 1969 (as amended)

·         Decree 24 and 25 of 1991

·         CBN (Amendment Decree No.3 and Banking and other Financial Institutions [BOFI (amended)] Decree No. 4 of 1997

These 1997 amendments placed the CBN under directly the Minister of Finance and effectively reduced it to a tool of the Federal Government.

The current legal framework within which the CBN operates is the CBN (Amendment) Decree No. 37 of 1998 which repealed the CBN (Amended) Decree No. 3 of 1997. The Decree provides a measure of operational autonomy for the CBN to carry out its traditional functions.

From above, it is obvious that the fundamental legal basis for CBN’s autonomy is virtually non-existent. Do we need to reinvent the wheel in order to join the new world order?

Part two (conclusion) of this article will review the role CBN should be playing in economic development and the benefits of autonomy. Also, it would review the correlation between economic stability and an independent central bank.

References/Links:

• Latest Update on CBN Reforms: http://www.cenbank.org/OUT/SPEECHES/2006/Govsp18-5-06.pdf
• History of CBN: http://www.cenbank.org/aboutus/centralbankofnigeria.htm