AN EVALUATION OF THE IN DEPENDENCY OF THE CENTRAL BANK OF NIGERIA
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Central banks are essentially
government banks. First and foremost, they govern monetary policy, controlling
how much domestic currency will circulate in a country’s economy at any given
time. They also act as financial agents for governments, managing and
disbursing liquid funds. Third, they may play an international role in setting
a country’s exchange rate and/or managing its foreign reserves. Finally, they
also have a number of supervisory and regulatory duties to ensure the ongoing
stability of the private banking sector.
Central bank independency refers to the
extent to which the central bank carries out these functions autonomously of
executive and legislative control.
In recent years, central bank independency
has assumed growing empirical and analytical significance. On the one hand, the
number of countries undertaking central bank reform has gradually increased
over the last two decades, escalating dramatically in the early 1990s (Maxfield
1997). On the other hand, this more visible and powerful role for the central
bank has been accompanied by a large literature in both economics and political
science as to the causes and consequences of independency.
The
Nigerian economy, on her adoption of democracy in 1999, therefore, started
exploring the monetary anchor that is suitable for her economy particularly
plague with high inflation and unemployment rate. As a result, the Central Bank
of Nigeria (CBN) announced its intention to adopt Inflation Targeting regime in
January 2009 which was later shelved (Uchendu, 2009). According to Odoko (2008)
the apex bank said it has shelved the commencement of earlier scheduled
inflation targeting expected to start in January, 2009 to enable it effectively
fashion out the operational framework in the Nigerian economy. Also, the
authority noticed that in most countries across the world today, the consensus
is to grant respective central banks instrument as well as financial and
budgetary independence so as to ensure their effectiveness in the formulation
and execution of monetary policy. Thus, the Central Bank of Nigeria was granted
partial operational autonomy, making it independent. By 2007, the CBN was given
total autonomy (CBN Act, 2007). Hence, the Nigerian monetary framework now
combines operational independence with transparency. An important feature of
the framework is increased accountability through the frequent publication of
the communiqué of the apex bank’s operation.
Recently,
this autonomy was threatened by the move by the lawmakers to amend the Central
Bank of Nigeria’s Act. This has caused a lot of concern to stakeholders and
researchers.
Hence,
this study is out to investigate the independency of the Central Bank of
Nigeria. This is especially important in view of the fact that the Central
Banks of Nigeria economies has experimented with exchange rate targeting and
monetary targeting in the past. According to Martijn and Hossein (1999) and
Dincer and Eichengreen (2009) , the case for independence and transparency is
based on the notion that it increases the credibility of monetary policy as
policy becomes predictable by private agents. It also adds to political credibility
of a country and the Central Bank, especially if policy has been time
inconsistent. Additionally, independency and transparency is associated with a
low inflation rate.
The
Central Bank of Nigeria was established by the CBN Act of 1958 and commenced
operations on July 1, 1959. The major regulatory objectives of the bank as
stated in the CBN act of 1958 is to: maintain the external reserves of the
country, promote monetary stability and a sound financial environment, and to
act as a banker of last resort and financial adviser to the federal government.
The central bank’s role as lender of last resort and adviser to the federal
government has sometimes pushed it into murky regulatory waters. After the end
of imperial rule the desire of the government to become pro-active in the
development of the economy became visible especially after the end of the
Nigerian civil war, the bank followed the government’s desire and took a
determined effort to supplement any short falls in credit allocations to the real
sector. The bank soon became involved in lending directly to consumers,
contravening its original intention to work through commercial banks in
activities involving consumer lending. However, the policy was an offspring of
the ndigenization policy at the time. Nevertheless, the government through the
central bank has been actively involved in building the nation’s money and
equity centers, forming securities regulatory board and introducing treasury
instruments into the capital market.
1.2 STATEMENT OF THE PROBLEM
Central
Bank Independence is closely associated with inflation targeting. Inflation
Targeting is defined as a framework for policy decisions in which Central Bank
makes explicit commitment to conduct monetary policy to meet a publicly
announced numerical inflation targets within a particular time frame (Aliyu and
Englama,
2009).
Central Bank therefore endeavors to adopt a monetary policy framework that
would ensure price stability which can only be achieved by the CBN’s
independency. The independency of the Central Bank of Nigeria has been
questioned recently by the action of the immediate past president of Nigeria,
Mr. Goodluck Jonathan in the suspension of the CBN governor Sanusi Lamido
Sanusi. However, the researcher is out to examine the independency of the
Central Bank of Nigeria.
1.3 OBJECTIVES OF THE STUDY
The
following are the objectives of this study:
1. To
evaluate the independency of the Central Bank of
Nigeria.
2. To
identify the benefits of the independency of the Central Bank of Nigeria.
3. To
determine the factors limiting the independency of the Central Bank of Nigeria.
1.4 RESEARCH QUESTIONS
1. What
is the level of independency of the Central Bank of
Nigeria?
2. What
are the benefits of the independency of the Central Bank of Nigeria?
3. What
are the factors limiting the independency of the Central Bank of Nigeria?
1.6 SIGNIFICANCE OF THE STUDY
The
following are the significance of this study:
1. The
findings from this study will educate the general public on the need for the independency
of the Central Bank of Nigeria with emphasis on the benefits of the
independence of the nation’s economy.
2. This
research will be a contribution to the body of literature in the area of the
effect of personality trait on student’s academic performance, thereby
constituting the empirical literature for future research in the subject area.
1.7 SCOPE/LIMITATIONS OF THE STUDY
This
study on the evaluation of the independency of the Central
Bank of Nigeria will cover the operations of the CBN with a view of identifying
the level of independence of the apex bank.
LIMITATION OF STUDY
Financial constraint– Insufficient fund tends to impede the
efficiency of the researcher in sourcing for the relevant materials, literature
or information and in the process of data collection (internet, questionnaire
and interview).
Time constraint– The researcher will
simultaneously engage in this study with other academic work. This consequently
will cut down on the time devoted for the research work.
REFERENCES
Aliyu, S and Englama, A (2009), Is Nigeria Ready for Inflation
Targeting?, MPRA Paper, no. 14870, Available Online http://mpra.ub.uni-muenchen.de/14870/
Martijn J and Hossein S (1999), ‘Central Bank Independence and
the Conduct of Monetary Policy in the Uniited Kingdom’, IMF
Working Paper, no 170.
Eichengreen, K. (2009). Measuring Central Bank Independence:
Ordering, Ranking, or Scoring? In King Banaian and Bryan W. Roberts Jr., eds,
The Design and Use of Political Economy Indicators. New York: Palgrave, 2008
Maxfield E, (1997), ‘Central Bank Independence and Transparency:
Evolution and Effectiveness, IMF Working Paper,
no.119.