As the Central Bank of Nigeria (CBN) adopts a tightening approach to combat soaring inflation, monetary policymakers are emphasizing the need for increased fiscal responsibility. This call comes in light of the federal government’s fiscal deficit, which has exceeded budget projections by over 85%, contributing significantly to rising prices in the country.
At its recent meeting, the Monetary Policy Committee (MPC) raised the monetary policy rate (MPR) by 50 basis points, increasing it to 27.25% from 26.75%. This adjustment marks a total increase of 850 basis points in 2024, despite a temporary slowdown in inflation rates. However, inflation surged to 32.7% in September, prompting further scrutiny of fiscal policies.
Dr. Aloysius Uche Ordu, a member of the MPC, highlighted the fiscal challenges impacting the CBN’s anti-inflation efforts. He noted that the federal government’s revenues fell short of targets, achieving only 37.9% of the expected amounts, largely due to shortfalls in the Federation Account Allocation Committee (FAAC) receipts. He remarked on the excessive recurrent spending driven by debt service payments, coupled with underperformance in capital spending.
Ordu stressed the importance of reprioritizing government expenditures to focus on essential capital projects, warning against the monetization of the deficit. He also pointed to positive developments in the external sector, with a balance of payments surplus of $2.47 billion, attributed to reduced import bills from the tight monetary stance.
Furthermore, he noted a significant reduction of over 75% in the federal government’s short-term borrowing from the CBN between December 2023 and July 2024, aligning with the current tight monetary policy. He urged collaboration between the government and the CBN to expedite the reduction of inflation and interest rates, rather than working at cross-purposes.
Bala Bello, CBN’s Deputy Governor of Corporate Services, echoed these sentiments, highlighting the urgent need to address the growing money supply through monetary policy. He underscored the importance of a synchronized approach between monetary and fiscal policies to effectively manage price developments and anchor expectations.
Committee member Bandele Amoo also stressed the urgency of tackling inflationary pressures that threaten price stability. He noted that while monetary policy has helped moderate aggregate demand, production challenges, rising food and energy costs, and high transportation expenses continue to exert upward pressure on prices. Amoo warned of the risks of spillover effects from persistent food inflation and urged the MPC to maintain vigilance to preserve the credibility of monetary policy gains.