By Chinwendu Obienyi
When the Central Bank of Nigeria (CBN) Governor, Dr Olayemi Cardoso, pledged last year to tame spiraling inflation and stabilise the nation’s beleaguered currency, few truly grasped the extent of the bank’s ambition. The CBN was not merely responding to a temporary crisis but was charting a bold course toward an inflation-targeting regime—a significant shift in Nigeria’s economic strategy.
In a series of calculated moves, the apex bank introduced a stream of circulars aimed at addressing the complexities of the foreign exchange (FX) market, a sector that had become increasingly volatile. Yet, perhaps its most controversial decision was the continued raising of interest rates—four times this year alone. The policy drew sharp criticism from various quarters, with many Nigerians, especially manufacturers, voicing their frustration. To them, the rising cost of borrowing was exacerbating the very issues it sought to resolve.
Manufacturers, in particular, argued that the persistent hike in interest rates had deepened the country’s economic woes. They pointed to the struggling naira and the relentless surge in inflation as symptoms of an overly aggressive monetary policy. The cost of production skyrocketed, forcing many businesses to scale back operations or shut down entirely. This not only threatened Nigeria’s industrial base but also jeopardised the livelihoods of countless workers across the country.
Yet, despite the mounting discontent, the CBN remained steadfast in its approach. The bank viewed these measures as necessary steps to curb inflationary pressures and restore confidence in the naira. By tightening monetary policy, it aimed to reduce excess liquidity in the system, which it believed was fueling the currency’s decline and driving up prices across the board.
Interestingly, data from the National Bureau of Statistics (NBS) last week gave a glimmer of hope that at least the apex bank rather than fiscal authorities, rightly understood the task ahead. Traditionally responsible for managing monetary policy—regulating interest rates, controlling the money supply, and stabilising the currency—the CBN has expanded its influence due to the perceived inadequacy of fiscal measures.
According to the NBS, headline inflation eased for the first time since December 2022, primarily supported by the high statistical base from last year’s corresponding period. Precisely, the country’s headline inflation eased by 80 basis points (bps) to 33.40% year-on-year (y/y) in July 2024 as against 34.19% y/y recorded in June. Notably, food prices (-134bps to 39.53% y/y) moderated after eighteen consecutive months of increase, while the core inflation (+6bps to 24.47% y/y) rose marginally.
The NBS further revealed that on a month-on-month basis, headline inflation slowed by 3bps to 2.28% (June: 2.31% month-on-month), mainly due to a moderation in food prices. Food inflation moderated by 8bps to 2.47% m/m in July (June: 2.55% m/m) primarily due to the commencement of the green harvest and the moderation in food demand previously boosted by the Idi el-Kabir celebrations in June.
However, the International Monetary Fund (IMF) in an article, noted that smart fiscal policy can help restore price stability and lessen the impact of the cost-of-living crisis.
The international body also added that to respond effectively to the sharpest upsurge in inflation in three decades and to address the damage done to households, policymakers should have a better understanding of how inflation affects various segments of society in different places.
Hence, the latest report on inflation suggests that the CBN has assumed the reins of Nigeria’s economy amid lax fiscal policies, highlighting a delicate balance of power in the country’s economic management.
This dynamic underscores the tension (it has always been tension) between the roles of the CBN and the government’s fiscal authority, particularly in the context of combating inflation and managing the broader economy.
At the last monetary policy committee (MPC), Cardoso while attempting to downplay the apex bank’s assertiveness and aggression, said, “The recently observed relative stability of the exchange rate is owed to the increased confidence of the market in the actions of the MPC to deliver the objective of bringing inflation within target. This fragile equilibrium must, however, be carefully managed in order not to jeopardize the achievements so far in attracting more capital flows to help sustain the recent stability in the market.
On the whole, both monetary and fiscal policy must work actively to fully arrest inflationary pressures and lay the foundation for sustainable growth of the economy. While the bulk of the necessary work rests in resolving the array of non-monetary issues facing the economy, the MPC must continue doing all that is in its powers in the short run, to curb inflationary pressure.”
Nigeria’s fiscal policies, overseen by the government, have been criticized for being overly lax. This includes high levels of public spending without sufficient revenue generation, reliance on borrowing, and weak fiscal discipline. The result has been rising public debt and budget deficits, which compound inflationary pressures and hinder economic stability.
Speaking to Daily Sun via a telephone chat last year, the Head, Research at FSL Securities, Victor Chiazor, noted that there is a growing disconnect between the CBN’s tight monetary policy and the government’s expansive fiscal stance was apparent.
“While the CBN raises interest rates and tightens the money supply to combat inflation, the government’s loose fiscal policy—characterized by high spending and inadequate revenue collection—undermines these efforts, making inflation control more difficult”, he explained.
Analysts” views
Economic experts have said that failure to harmonise fiscal and monetary policies exacerbates the economic difficulties faced by ordinary Nigerians. According to them, inflation reduces disposable income, increases poverty, and erodes savings, particularly for those on fixed incomes or in vulnerable economic positions.
The Minister of Finance and Coordinating Minister of the Economy, Wale Edun, had a during a programme monitored by Daily Sun, noted that Nigeria is no longer living on borrowed money.
However, the country faces a critical financial challenge as debt repayment now exceeds both recurrent and capital expenditure, despite significant infrastructure gaps. This suggests that the country might indeed have to borrow to repay its debts.
The Group Chief Executive Officer, Afrinvest West Africa, Ike Chioke, pointed out that despite expectations of stability amongst the two authorities, there is a need for stronger and effective coordination between fiscal and monetary authorities
This he said is central to Nigeria’s ambitious aim of achieving a $1 trillion economy by 2030.
In their intervention, analysts at Cordros Research, considered two key factors and their potential impact on consumer prices. According to them, the factors include the recent Retail Dutch Auction in the Foreign exchange market aimed at reducing FX demand pressure and stabilising the naira and increased PMS prices due to insufficient supply.
They added that they expect this to mitigate the exchange rate pass-through effect on consumer prices in August, particularly for imported food and non-food items.
They said, “While we acknowledge the FG’s approval of some measures in moderating food prices, including the distribution of agro-inputs to farmers and suspension of import duty on essential food items, we do not expect a significant decline in food prices in August. This is because of an anticipated delay in the execution of the initiative by Nigerian Customs despite the approval in July. Consequently, we project food inflation to rise by 2.38% m/m in August, down from 2.47% m/m in July, resulting in a year-on-year rate of 37.54% (July: 39.53% year-on-year).
While the CBN’s FX retail auction is expected to positively affect the prices of imported non-food items, we believe that higher transportation costs driven by the increase in PMS prices due to the tight supply in late July and early August could offset gains. As a result, we expect core inflation (excluding farm produce) to increase by 2.05% m/m (July: 1.99% m/m), pushing the year-on-year rate to 26.09% (July: 26.28% y/y).
Accordingly, we forecast headline inflation to moderate marginally by 2bps to 2.26% m/m (July: 2.28% m/m) in August, translating to a 118bps slowdown in the y/y inflation rate to 32.21% (July: 33.40% y/y).”
While the CBN’s proactive role in steering the economy is vital in addressing inflation, a lasting solution requires a more disciplined and coordinated approach between Nigeria’s monetary and fiscal authorities. Without this alignment, the country may continue to face incoming economic instability and inflationary pressures that could hinder long-term growth and development.