Joseph O Sanusi: Central banking authority, economic stability and the rule of
law
Paper presented by Dr Joseph O Sanusi, Governor of the Central Bank of Nigeria, at the Ninth Annual
Harvard International Development Conference, Boston, 4 April 2003
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I. Introduction
It is a great privilege for me to participate in this year's Harvard International Development
Conference. The theme of the conference is quite relevant to developing countries. I, therefore, thank
the organizers for the opportunity offered me to share my thoughts and experiences with you on:
Central Banking Authority, Economic Stability, and the Rule of Law.
The world over, the development process is anchored on the pursuit of sound macroeconomic policies
that will promote sustainable economic growth, create more jobs, and ensure equitable distribution of
income to raise the living standard of the populace. The successful pursuit of these goals requires
policies that will promote openness in trade, efficient financial system, increased capital flows,
development of information and communication technologies and enhanced technical capability. The
implementation of such policies would enable a country to integrate into the world economy and derive
the gains and, sometimes, the risks from globalization. The centrality of the central bank in forging the
necessary macroeconomic environment for sustainable economic growth and development is
generally incontrovertible. The theme for this panel discussion is very appropriate in this regard.
The key issues I seek to explore at this forum are:
What is the role of the central bank and monetary policy in the development process?

 What has been the experience of the Central Bank of Nigeria in the development process?
What are the challenges and constraints facing the Bank in the process?

In discussing these issues, my focus will be on the experience of the Central Bank of Nigeria, in the
context of international best practices.
II. The role of the Central Bank and monetary policy in the development process
The pursuit of price stability has come to be regarded as the raison d'etre of central banks in recent
times. The near universal acceptance of price stability as the overriding goal of monetary policy
derives from the recognition that, in the long run, monetary policy impacts on the price level and its
dynamics. Consequently, policy instruments at the disposal of central banks should be capable of
influencing the price level and expectations in the desired direction, toward the achievement of
non-inflationary economic growth.
The issue that arises at this juncture is whether the central bank's pursuit of price stability and financial
sector soundness is the only requirement to sustain the development process. While the maintenance
of price stability has increasingly become the main mandate of most central banks, those in the
developing countries are charged with the responsibility to promote economic development, in addition
to the pursuit of the macroeconomic stabilization objective.
Central banks' direct role in the development process, especially in less developed economies, stems
from the absence of efficient financial markets and institutional structures, which are pre-requisite for
the effective transmission of monetary policy to the real economy. In addition, in the pursuit of the
overall economic goals of the nation, the stabilization objective of the central banker often conflicts
with the sectoral pursuits of the political authority.
One thing all central banks, the world over, have in common is the maintenance of financial stability as
a key factor influencing macroeconomic performance and efficient payments system. The legal
framework and institutional arrangements vary widely country by country in the context of the act
establishing the central bank. As we are all aware, a central bank is usually established by an Act of
Parliament that clearly states its mandate.
III. The experience of the Central Bank of Nigeria (CBN)
The critical role of the CBN in the management of the Nigerian economy has been made obvious by
the provisions of the law establishing the Bank. The core mandate of the CBN as spelt out in the CBN
Act of 1958 include: issuance of legal tender currency, banker and financial adviser to the Federal
Government, lender of last resort to banks, maintenance of external reserves to safeguard the
international value of the currency, promotion of monetary stability and a sound and efficient financial
system. In order to discharge its responsibility efficiently and effectively, the Bank must have credibility
within and outside the country. Towards this end, the Act, with the subsequent amendments, goes
further to establish a governance structure with an independent Board with responsibility for policy
formulation and administration of the Bank, subject to periodic reports to both the Executive and
Legislative arms of the government.
Although the original Act mandates the CBN to promote monetary stability, it was in the 1999
amendment to the Act that actually conferred discretionary powers on the Governor, the Board and
Management of the Bank, in the formulation and implementation of monetary policy, especially the
determination of the appropriate interest rate regime and exchange rate policy. In other words, the
Bank was granted instrument autonomy under the amendment to the Act. In view of the destabilizing
effect of monetary financing of Government deficits, the Acts specifies the limit of the CBN lending to
government in terms of Ways and Means Advances to the Federal Government in the event of
temporary deficiency of budget revenue, which should not exceed 12.5 per cent of its estimated
recurrent budget revenue. Such advances should be repaid fully by the end of the Government's
financial year. Moreover, the total amount of Government securities of more than two years tenor held
by the CBN should not exceed 75 per cent of the total demand liabilitiies of the Bank.
Cognizant of the importance of central bank autonomy for and the significance of fiscal prudence to
the effective conduct of monetary policy, the CBN was actively involved in the Fiscal Responsibility
Bill, currently under consideration by the National Assembly of the Federal Republic of Nigeria. The
law, if passed, would establish further limits on Government borrowing from the CBN. Under the
current dispensation, the effectiveness of monetary policy is often constrained by fiscal surprises. In
particular, monetary financing of large fiscal deficits, which averaged 7.5 and 5.6 per cent of GDP
annually in the 1980s and 1990s, respectively, resulted in the over-burdening of monetary policy and
its effectiveness. This has of course been moderated by the current democratic government and
reduced to annual average of 4.0 per cent in 2001 and 2002.
In keeping with the principle of transparency and accountability in the conduct of monetary and
financial policies, the CBN publishes its monetary policy objectives, targets and measures for a
two-year period. The exercise involves the review of developments in the economy during the
preceding year, the identification of the prospects and problems in the years ahead and the outlining
of the policy goals and performance targets for the period. The Monetary Policy Committee (MPC)
meets every fortnight to appraise the performance of the economy and conditions in the money and
foreign exchange markets with a view to reviewing the current policy measures, either in terms of
adopting new policy initiatives or fine-tuning the existing ones as the need arises. The Committee is
made up of the Governor as Chairman, four Deputy Governors and heads of relevant departments as
members. Others are two members of the Board of Governors, including the Permanent Secretary,
Federal Ministry of Finance.
In the spirit of transparency, the summary discussions and decisions of the MPC are communicated to
the general public in newspaper publications every month. Similarly, another committee, the Financial
Sector Surveillance Committee (FSSC) also meets every fortnight to review developments in the
financial sector with a view to taking appropriate regulatory/supervisory action that will ensure the
stability and soundness of the system.
Moreover, in order to enhance regulatory effectiveness and stability of the financial sector, the
Financial Services Regulation and Coordinating Committee (FSRCC), meets to coordinate activities of
the various regulatory institutions in the sector. The CBN Governor acts as the chairman, while other
members include chief executives of the Securities and Exchange Commission, Insurance
Commission, Corporate Affairs Commission and the Federal Ministry of Finance. The Committee
works towards minimizing arbitrage opportunities that are usually created by differing regulatory and
supervisory standards among the various agencies; deliberates on problems experienced by every
member in its relationship with any financial institution, and bridges any information gap encountered
by any regulatory agency in its relationship with any type of financial institutions.
The CBN takes its obligation to enlighten stakeholders in the economy on monetary and financial
policies seriously. In this regard, the need to communicate to and obtain feedback from the public was
instrumental to the establishment of the Monetary Policy Forum, as a medium for dialogue and public
enlightenment among the monetary authorities, the banks, academia, organized private sector and
other stakeholders in the economy. The Forum was created, bearing in mind that monetary policy
works best in an environment in which the views of key stakeholders are taken into consideration in
both its formulation and implementation. This initiative is consistent with the global move towards
greater transparency and openness in the conduct of monetary and financial policies. The Forum also
serves as a medium for educating the public on CBN's monetary policy operating framework, targets
and outcomes. It meets quarterly, while the wider forum, the Annual Monetary Policy Conference,
holds every November. Finally, consistent with Section 9, (a) and (b) of the Act, the Bank, from time to
time reports to the President and makes a formal report to the National Assembly of the Federal
Republic of Nigeria bi-annually. Clearly, these processes and structures have contributed in no small
measure to the positive profile of the CBN in recent times.
The CBN, like most central banks in the developing economies, undertakes some non-traditional
central bank functions such as promotion of economic development, especially during the formative
years in the 1960s and 1970s. The contribution of the CBN in this regard, was focused on the creation
of the financial environment and institutional framework conducive to the mobilization and channeling
of financial resources into productive investment. Thus, during the first decade of its establishment, the
Bank concentrated on the task of promoting and transformation of the rudimentary financial structure
of the economy. These included the issuance of money and capital market securities such as the
Nigerian Treasury Bills and Federal Government Development Stocks. Moreover, it provided technical
assistance to other relevant institutions, and start-up capital for the development of money and capital
market institutions. The CBN nurtured from the cradle such institutions like the Nigerian Stock
Exchange, Securities and Exchange Commission and Nigeria Export-Import Bank. The specialized
finance institutions established by the CBN, in collaboration with the Federal Government, included the
Nigerian Industrial Development Bank (NIDB), Nigerian Bank for Commerce and Industry (NBCI) -
both now merged to form the Bank of Industry (BOI) to provide long-term capital for development. The
CBN initiative to encourage long-term bank lending to the economy included the establishment of
various refinance and guarantee schemes, focused on the priority sectors of the economy. Two of
such schemes are the Agricultural Credit Guarantee Scheme Fund (ACGSF), and Export Refinance
Scheme.
IV. Challenges and constraints
As central bankers, it is beneficial to evolve the culture of a regular critical appraisal of our
performance with a view to improving on our effectiveness and adapt to changes in the economic
environment. Clearly, every central bank faces constraints in the conduct of economic policies, some
of which create the problem of policy credibility. While some of such constraints are attributable to
external factors, most are induced from within the domestic economy. Our experience in Nigeria is not
an exception.
Trade off in price stability mandate
One of the major problems is policy conflict in the pursuit of the overall economic objectives of
government, particularly the trade-off in the pursuit of stabilization and growth objectives. Sometimes
central banks are confronted with problems of inflation and stagnation, otherwise known as stagflation.
If the central bank sticks rigidly to the mandate of price stability, it might address the problem of
inflation in such a way that the fall in aggregate output might be exacerbated. If, on the other hand, the
problem of weak growth performance is to be addressed, policies designed to stimulate higher levels
of economic activity might result in further acceleration of the inflation rate. The need to maintain a
delicate balance between the two conflicting objectives is, therefore, obvious.
Whatever policy mix is adopted, it is bound to influence the way central bank's policies are perceived
by the public and the confidence it engenders in the financial system. One of the ways we have
addressed this dilemma in Nigeria is to ensure that, in the pursuit of the primary objective of price
stability, due consideration is given to developmental objectives. As much as possible, the CBN has
avoided direct intervention in development financing, particularly where lending at interest rates below
the market rates are involved. The Bank has, in this regard, embarked on schemes to establish
quasi-government institutions and encouraged government funding through the Budget. There are
also some relevance in the provision of refinancing and credit guarantee schemes, as earlier outlined,
particularly for the agricultural and industrial sectors. The risk is that such schemes could discourage
the growth and efficiency of financial intermediation, particularly the mobilization of domestic savings.
Macroeconomic policy environment
Economic policies can only succeed where infrastructural impediments to supply response have been
substantially minimized. Because most macroeconomic policies (especially monetary policy) work best
through their effect on aggregate demand and supply conditions, structural problems could make the
economy less responsive to policies. When a policy fails to achieve the intended objectives, it creates
credibility gap for the central bank and outright pessimism in the process. Our approach to dealing with
this problem has been to enhance public understanding of what monetary policy can and cannot do,
while collaborating with other organs of government to ensure the complementarity of the various
economic policies.
Financial market infrastructure and institutions
The absence of efficient and sound financial institutions and necessary market infrastructure, which
are critical to effective conduct of monetary policy and its transmission mechanism, constitutes a major
constraint to the achievement of policy goals in most developing countries. Institutional reforms,
enforceable tax policy, simplified accounting framework and a fair and efficient judicial system, are
important for effective policy implementation in a coherent, credible and consistent manner.
Credible information
Poor and unreliable data is another major constraint to credible policies. The lack of timely and reliable
data renders monitoring and evaluation of policy implementation difficult and the analysis arising from
such data, less reliable. This undermines the setting of accurate targets and causes delays in policy
response to changes in economic conditions.
Fiscal dominance
The essence of complementarity between monetary and other policies, particularly the fiscal policy,
has always been emphasized as critical to the effectiveness of monetary policy. In countries
characterized by fiscal expansion, resulting from large deficits financed by the banking system,
particularly the central bank, the achievement of monetary policy objectives becomes very difficult.
Indeed, the outcome of the central bank policies becomes uncertain. This problem has been
addressed, effectively, in many countries particularly among those that have experienced intractable
problem of inflation, through the prohibition of central bank lending to the government. Efforts to limit
the financing of government deficits by the CBN have not been successful, despite its operational
autonomy. The problem of fiscal surprises in the country is compounded by lack of control in the
expansionary fiscal operations of the state and local governments.
Corporate governance
For credibility of the central bank to subsist, a widely accepted corporate governance arrangement
must be put in place. In this regard, good governance must begin with internal consistency in the
bank's operational framework and administrative structure such that the attainment of the primary
objective of monetary and financial sector stability will be ensured, while high quality of service to
government, financial institutions and other stakeholders in the economy is maintained. Besides,
robust contingency plans that will promote the soundness and stability of financial institutions must be
strictly implemented.
In recognition of the fundamental role of the effective conduct of monetary policy in any economy a
central bank should accord special attention to enhancing its efficiency. Towards this end, the central
bank must be mindful of the quality of its staff in terms of technical skill, competence and knowledge.
Cognizant of the need for capacity building to ensure enhanced efficiency in meeting its mandate, the
CBN has in the past three years embarked on a comprehensive reform agenda under which its work
processes and procedure have been upgraded and re-engineered.
V. Conclusion
In conclusion, I would like to make some suggestions on how good governance can be enthroned and
measured, drawing on international best practices. In consonance with the principles of good
governance, central banks should be autonomous from government in discharging their statutory
mandates. Such independence has often been associated with the powers to limit credit to the
government, given the destabilizing effect of central bank lending to finance public sector deficits.
Governments should be forced to balance their budgets or borrow at market rates to finance their
deficits. Although this might be a problem for countries with under-developed financial markets, the
effect in promoting fiscal discipline and facilitating the achievement of growth objectives is deemed to
be more profound. An independent central bank should ensure that its policy intervention is well
coordinated in the context of the overall government economic policies and objectives.
Policy Credibility can also be enhanced if central banks submit themselves to third party assessments,
e.g. by the IMF, World Bank, and subscribe to acceptable international conventions and codes on
central banking. Such a convention is the 1988 Basel Accord, which established guidelines on
international minimum capital standard that limits banks' capital requirement to their credit exposure.
Adopting such standards would encourage central banks to reform their procedures and processes in
line with international best practices.
Moreover, accountability and transparency are best enhanced through effective information
dissemination. Central banks should periodically subject themselves to public scrutiny on their
operations and frameworks. Another best practice that comes to mind is the example of the Reserve
Bank of New Zealand, where every year, an outstanding economist is appointed and mandated to
review the monetary policy of the previous year.
These are some of my thoughts on strategies for enhancing the effectiveness of monetary policy in
achieving economic stability. I sincerely thank you all for your kind attention.