Uwaleke Seeks Amendment of CBN Act to Strengthen Monetary, Fiscal Policy Coordination
* Wants inflation targets jointly determined by finance ministry, apex bank
Ndubuisi Francis in Abuja
President of the Capital Market Academics of Nigeria (CMAN) and Director, Institute of Capital Market Studies (ICMS), Nasarawa State University, Prof. Uche Uwaleke, has called on appropriate authorities to amend the Central Bank of Nigeria (CBN) Act, 2007
in order to establish a transparent framework for strengthening fiscal and monetary policy coordination
His intervention followed the recent Memorandum of Understanding (MoU) between the Federal Ministry of Finance and the CBN to formalise their collaboration on fiscal and monetary policy coordination.
In an article titled, ‘Beyond the MoU: Building a Coherent Fiscal-Monetary Policy Framework,’ which he made available to THISDAY, weekend, Uwaleke noted that the next logical step should be to move fiscal and monetary coordination from administrative practice towards a durable institutional framework.
According to him, the present MoU can provide a useful foundation, but an arrangement of such economic importance should ultimately rest on clear statutory provisions.
He said: “Nigeria could consider reviewing and, where appropriate, amending the relevant provisions of the CBN Act 2007 and other fiscal-governance legislation to establish a transparent framework for fiscal-monetary coordination, clarify the respective responsibilities of the fiscal and monetary authorities, establish procedures for setting broad inflation objectives, and protect the CBN’s instrument and operational autonomy.
“Such legislation should not create a mechanism through which fiscal authorities can dictate monetary-policy decisions. Rather, it should codify the distinction between shared macroeconomic objectives and independent policy instruments. The fiscal authority should remain responsible for fiscal policy, taxation, public expenditure and debt management, while the CBN should retain the authority necessary to conduct monetary policy.
“At the same time, both institutions should be required to exchange information, publish relevant assumptions and explain publicly how their policies interact. The broader objective should be a coherent economic policy architecture in which monetary, fiscal, trade, financial and structural policies reinforce one another. Indeed, Nigeria’s current circumstances make this institutional question especially urgent.”
While applauding the MoU, the one-time Imo State finance commissioner said it provides a framework for cooperation that transcends personal relationships between the Minister of Finance and the CBN Governor, establishing structured mechanisms for information-sharing, aligned macroeconomic assumptions and the resolution of areas where fiscal and monetary actions might otherwise work at cross-purposes.
According to him, the logic behind the initiative was straightforward, adding that fiscal and monetary policies may be administered by different institutions while they operate within the same economy and ultimately affect many of the same variables.
He further argued that the MoU was significant not simply because it creates another mechanism for meetings between government officials, but because it recognised an elementary truth of macroeconomic management that price stability cannot sustainably be pursued by monetary policy in isolation from fiscal policy.
The agreement, Uwaleke affirmed, provides for more consistent forecasts of inflation, economic growth, government revenue, liquidity, financing requirements and the external sector, adding that it also envisages stronger information-sharing and a coordinated approach to inflation that combines fiscal discipline with measures directed at food, energy and logistics costs.
He explained that such coordination, however, should never be confused with the subordination of the CBN to the fiscal authority, explaining that the distinction between coordination and interference was fundamental.
He stated: “Central-bank independence does not mean that monetary authorities should operate in an economic vacuum.
“Rather, it means that, once the objectives and institutional framework of monetary policy have been established, the central bank should retain the freedom to determine the instruments and timing required to achieve those objectives without undue political pressure.
“Nigeria’s own legal framework recognises this principle. Section 1(3) of the CBN Act 2007 provides that the Bank shall be an independent body in the discharge of its functions, while Section 30 gives the Bank powers over open-market operations and other securities for liquidity management.
“The challenge, therefore, is not to choose between coordination and independence, but to design institutions in which both can coexist: coordinated objectives and information-sharing on one hand, and operational and instrument independence on the other.
“Indeed, international experience demonstrates that central bank independence does not necessarily require a central bank to possess complete goal independence.”
In several advanced and emerging economies, he said governments or legislatures establish the broad monetary-policy objectives or inflation targets, while central banks retain substantial independence over how those objectives are achieved, citing the United Kingdom, United States of America, South Africa and New Zealand, among others.
As Nigeria advances towards a more explicit inflation-targeting framework, Uwaleke said the question of who should establish the target deserves careful institutional consideration, adding that a credible arrangement could involve the fiscal and monetary authorities jointly determining an inflation objective within a transparent legal framework, while leaving the CBN free to determine the policy rate, liquidity operations, reserve instruments and other monetary tools necessary to pursue that objective.
Such an arrangement, he argued, would also strengthen democratic accountability, explaining that Inflation is not merely a monetary statistic, but has profound consequences for household welfare, business planning, wages, investment and public finances.
“If an inflation target is ultimately a national economic objective, there is a legitimate argument for ensuring that its determination reflects the broader economic policy framework rather than being treated exclusively as the preserve of the monetary authority.
“The critical safeguard would be to ensure that the process is transparent, rules-based and insulated from short-term political pressures.The argument for stronger coordination is reinforced by the experience of recent Nigerian monetary policy.
“The CBN has pursued a significantly tighter monetary stance as part of the effort to bring inflation under control and stabilize the macroeconomic environment. The IMF has specifically welcomed progress towards inflation targeting and noted that monetary tightening, together with broader reforms, has contributed to improved macroeconomic stability.
“These developments deserve recognition. Exchange-rate stability, improved foreign-exchange market functioning, stronger external buffers and greater liquidity in the foreign-exchange market are important foundations for restoring confidence in the Nigerian economy.
“The CBN itself has identified operational independence, clearer inflation targeting and stronger communication as important components of its evolving monetary-policy framework.But monetary tightening cannot be an end in itself.
“Once tight monetary policy has served its stabilization purpose, attention must increasingly turn to the cost and availability of credit,” he said.
Uwaleke elaborated that persistently high borrowing costs can restrain private investment, working capital, housing finance and business expansion, further arguing that an economy cannot achieve durable growth simply by suppressing demand; it must also create conditions under which productive investment can obtain financing at sustainable costs.
“This is where fiscal-monetary coordination becomes particularly important. If fiscal operations generate avoidable liquidity pressures or excessive government demand for domestic financing, monetary policy may be forced to remain tighter for longer than would otherwise be necessary.
“The result can be higher borrowing costs for businesses and households and weaker private-sector credit. The MoU’s emphasis on coordinating government financing and cash management to reduce the risk of crowding out private-sector credit is therefore economically consequential,” he stated.
The CMAN President said government borrowing and expenditure can influence liquidity, aggregate demand, interest rates and inflation, while monetary policy affects the cost and availability of credit, government debt-servicing costs, investment and economic activity.
“When the two arms of economic policy pull in different directions, one authority can end up attempting to offset the unintended consequences of the other. Conversely, when they operate within a coherent macroeconomic framework, their respective instruments can reinforce rather than undermine one another.
“This is particularly important as Nigeria seeks to consolidate the macroeconomic gains of recent reforms while addressing the continuing burden of high prices and expensive credit.
“The MoU is therefore significant not simply because it creates another mechanism for meetings between government officials, but because it recognises an elementary truth of macroeconomic management: price stability cannot sustainably be pursued by monetary policy in isolation from fiscal policy.
“The agreement provides for more consistent forecasts of inflation, economic growth, government revenue, liquidity, financing requirements and the external sector.
“It also envisages stronger information-sharing and a coordinated approach to inflation that combines fiscal discipline with measures directed at food, energy and logistics costs.Such coordination, however, should never be confused with subordination of the CBN to the fiscal authority,” the financial expert said.