Financial policy formulation, implementation and impact assessment

There are those who believe that the Central Bank as the regulator of the nation’s finances, its monetary policies and its banks is frighteningly and excessively powerful and should thus be subject to regulation itself by some independent body appointed by the National Assembly. There are, on the other and, in light of the nation’s […]

There are those who believe that the Central Bank as the regulator of the nation’s finances, its monetary policies and its banks is frighteningly and excessively powerful and should thus be subject to regulation itself by some independent body appointed by the National Assembly. There are, on the other and, in light of the nation’s experience under military dictatorship when the CBN was merely a monetary warehouse for government who cart away billions in naira and other hard currencies, the CBN should be completely autonomous in all it as operational and structural ramifications.
This debate is on-going. Recently, I gave a Lead paper at a Retreat of the Financial Policy And Regulation Policy Department of the Central Bank of Nigeria held at the Nike Resort Hotel, Enugu on Practical Approaches to Financial Policy Formulation, Implementation and Impact Assessment. I believe that the on-going debate on the status of the autonomy of the CBN will benefit from excerpts of this Lead Paper. This is why I am serializing the Paper on this page in the next few outings.
It is with tremendous and thrilling delight that I accept this invitation to present a paper in this all-important Retreat of a critical Department of Nigeria’s apex bank, the Central Bank of Nigeria. I am conscious of the fact that, not being an economist and a financial expert, I am galloping where Angels fear to tread, or at best, swimming in hot and troubled waters. I am consoled and re-assured by the fact that, coming from the apex think-tank of the nation (NIPSS), charged with policy and strategy formulation/reflection, I am able to stand on one critical leg of the discourse foot-hold of this Retreat. By way of germane digression, literary artists are never shy of dabbling in economic and financial discourses. That was why, immortal Shakespeare, perhaps the greatest literary classicist of all times, once offered a solid counsel on debt acquisition in his play, Hamlet, where a father, Polonius, counseled his son on financial frugality.
“Never a lender no a borrower be” as “debt dulls the edge of husbandry”. I thus thank the CBN for inviting me to participate in this Retreat.
Every economy is faced with the achievement of five macroeconomic goals, viz ‘economic growth and development, price stability, balance of payments equilibrium, exchange rate stability and high level of employment. Most governments translate these into short, medium and long term goals. Thus, we have short-term annual budgets, the transformation agenda, which is a medium-term goal and Vision 20-2020 which is a long term goal.  In order to achieve these objectives, policies are formulated whose implementation facilitates the delivery of efficient and effective services to the people.
 A policy is a principle or rule to guide decisions and achieve rational outcomes. In other words, policies are not the real actions, but they help an organization or the governments to come up with the right actions to take in order to achieve some set goals. Htwe (2012) notes further that policies provide the framework for testing proposals and activities, and measuring progress. Implementation is regarded as the translation of the policies into action. This is evidenced by effective service delivery.  Sound Policy formulation and implementation are therefore very vital for the achievement of any set goal(s).
   The Central Bank of Nigeria (CBN) is charged with the responsibility of formulating and implementing monetary policy in Nigeria. Its core mandate is derived from the 1958 Act of Parliament and its subsequent amendments. They charge the CBN with the overall control and administration of the monetary and financial sector policies of Nigeria. The objectives of the CBN, which are also its core mandate are to: i) ensure monetary and price stability; ii) issue legal tender currency in Nigeria; iii) maintain external reserves to safeguard the international value of the legal tender currency; iv) promote a sound financial system in Nigeria; and v) act as Banker and provide economic and financial advice to the Federal Government. However, the thrust of monetary policy in Nigeria in the past few years has been the promotion of price and banking stability       In achieving these objectives, various monetary and financial policies have been formulated and implemented with varying degrees of success. The reforms experienced in the financial system have seen CBN severally changing their policies. Thus, from the pre-SAP era that witnessed the use of the Keynesian option of government-managed economy to the present market economy, the policies have gone through numerous revisions. The country has experienced double digit inflation for some time. As at June 2012, core inflation rose to 15.2 percent (MPC Communiqué, 2012). This continuous increase begs the question as to the efficacy of monetary policies in addressing the issue of price stability. In spite of the monetary tightening by the CBN, there does not appear to be much improvement in the macroeconomic indicators, especially inflation and unemployment. The CBN, through its Monetary Policy Committee (MPC), puts the blame of the continuous rise in prices at the doorstep of fiscal spending and global food, fuel and other commodity prices, as well as financial instability (MPC Communiqué 2012).
Given the above background, the question is: is the problem of the CBN that of the absence of sound policies or effective implementation?
Let us begin with policy formulation. There are various models of policy cycles in the literature. This is a tool used for analyzing the development of a policy.  It shows the stages involved in developing a policy item, and it is sometimes referred to as a stagist approach. It facilitates organized thinking about policy.  Walt (1994) gives a four stage policy process: a) problem identification and issue recognition, b) policy formulation, c) policy implementation and d) policy evaluation. For the Dutch health policy process, it is a four-step cycle that starts with policy evaluation since it is believed that there is always an existing policy; policy preparation, policy development and policy implementation. There seems, however, to be no difference between policy preparation and development. It provides a version which includes the following stages: agenda setting (problem identification); policy formulation, adoption, implementation and evaluation.