Economics, Featured, Opinion

The Sanctity of Institutional Independence– An Economic Opinion

Abdulrahman Oyedeni


March 31, 2023

The security situation in underdeveloped regions of Nigeria has markedly deteriorated in the last decade as a multitude of armed groups, including, religious extremists, herder allied groups, and criminal gangs, have exploited the economic and security void. Inflation and poor balance of trade coupled with stagnating economic prospects have further strained the fabric of Nigerian society. Distrust in public institutions has reached precipitous levels as illustrated in the disastrous rollout of new naira notes and a historically low voter turnout in the presidential election on March 14, just 27%.

The CBN was heavily criticized by the public after the available supply of notes was quickly exhausted and cash withdrawals were restricted. Allegations of corruption were levelled at the apex bank after currency hawks reportedly had access to a vast supply of the new notes. Meanwhile, institutional banks were apparently barren. The politicking even permeated institutional independence, with Governors across many states using their executive powers to temporarily suspend the CBN’s decision to void the N200 N500 and N1000, on the grounds of financial and societal stability. The Supreme Court of Nigeria, delayed the expiry of the N200 N500 and N1000 notes, pending a suit brought forward on behalf of the majority of states in Nigeria vs the Federal Government and CBN. 

The suit concluded on March 3rd when the Supreme Court unanimously ruled to reinstate the old naira notes on the grounds that the public was not given enough notice. Following the ruling, there was widespread uncertainty as the CBN had already recently ‘overruled’ a Supreme Court order. As previously reported, institutional bankers take their policy directives from the apex bank, their chief regulator and cannot unilaterally make monetary decisions. Some bankers, under the condition of anonymity, have admitted that the CBN takes its order directly from the presidency.

The CBN’s silence following the ruling did little to dissipate the growing unease around the public tussle between institutions. Ten days after the Supreme Court order, on March 13th, President Buhari issued a statement saying that he had not given any instructions to the CBN to disobey the Supreme Court’s ruling. A relief, the N200 N500 and N1000 notes were reinstated until December 31st, 2023. The institutional infighting had tranquilly concluded.

Despite the positive conclusion of the naira debacle, very real risks have been unearthed in the process that requires serious consideration. The biggest risk would be a blurring of the lines between institutional jurisdiction and independence. Both concepts, jurisdiction, and independence, are inter-connected and lay the foundation of a balanced and effective federal government. Central banks are not an explicit branch of government; however, their independence is paramount in executing their mandate. 

The CBN’s mandate is as follows:

  • ensure monetary and price stability;
  • issue legal tender currency in Nigeria;
  • maintain external reserves to safeguard the international value of the legal tender currency;
  • promote a sound financial system in Nigeria; and
  • act as Banker and provide economic and financial advice to the Federal Government.

The mandate is exclusively economically focused, “secular”, to reduce the probability of politically motivated policies. This allows the apex bank autonomy to contradict fiscal policy if economic realities contradict the federal governments agenda.

The paradox surrounding the independence of central banks is the ability of presidents to appoint – pending congressional approval – and discharge the head of the apex bank. A central bank should be considered as a facilitator to achieve the federal governments agenda to the extent economic realities permit. Serious economic and social consequences occur when a central bank loses its autonomy and becomes a mere extension of the executive branch to accommodate a political agenda as seen in Venezuela and Turkey.

Venezuela, like Nigeria, is a petrol-rich country. Venezuela was once one of the wealthiest nations in the world ahead of the likes of Spain and Israel. While the factors precipitating the carving out of its economy are plentiful, it must be noted that the undermining of the chief mechanism for regulating and balancing – institutional jurisdiction and autonomy – was the catalyst. After the election of Maduro, the successor to populist president Hugo Chavez enjoyed a supermajority in Venezuela’s congress. 

Maduro’s agenda was to consolidate power beginning with the legislative body: congress. Political sycophants within the party approved a bill that would allow Maduro to rule by decree, essentially handing over their power to the executive. Maduro faced with a difficult economic situation resorted to immediate remedies as opposed to structural reforms that would have benefitted the country in the long run. To achieve this agenda, while vested with the powers to rule by decree, Maduro passed a law that allowed him to appoint and discharge the chairman of the central bank without congressional approval. This stripped all of the central bank’s autonomy to carry out its mandate and assimilated it as an extension to the executive branch.

As a result, the public debt in Venezuela ballooned with hyperinflation decimating the value of the currency. This resulted in major difficulties for business and commercial transactions as the value of the currency lost value by the hour. The central bank could not go against the President’s agenda to combat hyperinflation. The Venezuelan economy is now unofficially dollarized – transactions are conducted using US dollars – since the public has lost all trust in the domestic currency’s (Bolivar) value.

Similarly, and more recently in Turkey, President Erdogan has attempted to subvert the autonomy of the central bank. President Erdogan has been president since 2014 and oversaw a period of strong economic growth until 2018 when fortunes began to change. Beginning in late 2018, the Turkish economy was facing serious headwinds and a weakened currency (Lira) and rising inflation levels. Fearing the political consequences of a recession, President Erdogan began to appoint central bank directors closely aligned with his agenda, regardless of economic consequences. As a result, when the chairman of the central bank raised interest rates, to tame inflation, he was dismissed and replaced with somebody more willing to accommodate President Erdogan’s agenda. Higher interest rates lead to slower economic growth as borrowing costs rise; this was antithetical to Erdogan’s agenda. Contrary to monetary orthodoxy, Erdogan began appointing central bank chiefs willing to cut interest rates regardless of inflation. Inflation in Turkey has risen to precarious levels as a consequence of pursuing a political agenda regardless of economic consequences. Inflation decays the purchasing power of individuals resulting in a lower standard of living.

The decision from Nigerian governors to override and pursue legal action in court regarding the naira rollout was a necessary decision to make. The advanced timing of exchanging notes was an unnecessary blunder on behalf of the CBN as it contradicted its stated mandate: to ensure price stability. However, this type of institutional tussling must not set a precedent lest the central bank be subverted for political gains. Subverting monetary policy for political gains may seem a tantalizing prospect, however, when fortunes change and economic realities begin to foment social unrest, the saying don’t mess with people’s money will become all too clear.

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