Nigeria: MPC Raises Concerns Over Fiscal Policies’ Impact on Inflation Control

Members of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) have voiced concerns that certain fiscal policies are undermining efforts to combat inflation in the country.

In their statements from the July meeting, published on the CBN’s website on Tuesday, MPC members highlighted that the current money supply, which stands at N4.05 trillion, has exacerbated credit expansion, putting additional upward pressure on inflation.

The committee members emphasized that achieving the desired outcomes is challenging when fiscal and structural policies either do not complement or actively counteract the CBN’s monetary tightening measures. They further stressed the necessity of additional monetary policy tightening to curb credit growth effectively.

Aloysius Ordu, one of the committee members, noted the complexities of the MPC’s task, particularly when fiscal and structural policies are not fully aligned with monetary objectives. He remarked, “The monetary policy measures taken so far are significantly constrained by fiscal pressures, making it difficult for monetary policy to fulfill its role. Now more than ever, monetary policy requires greater support from fiscal and structural policies.”

Ordu praised the government’s recent directive for the Nigerian National Petroleum Corporation (NNPC) to sell 450,000 barrels of crude oil daily to Dangote and other local refineries. This move, he noted, is expected to save over $7 billion in foreign exchange. He also underscored the importance of addressing oil theft, revitalizing dormant oil wells, and boosting production to meet the 1.78 million barrels per day target in the 2024 federal budget. Furthermore, he called for urgent reforms to Nigeria’s tax system, which currently generates less than 8% of GDP in tax revenues. He emphasized that these measures, along with efforts to reduce governance costs, would alleviate fiscal pressures and enhance the effectiveness of monetary policy.

Ordu advocated for maintaining fiscal discipline to stabilize inflation and support economic growth, noting that fiscal behavior plays a critical role in influencing inflation and economic activity. He ultimately voted to maintain the current policy rate.

Another MPC member, Bala Bello, argued that to consolidate recent gains, it is crucial to maintain a tight monetary stance to combat inflation while also exploring complementary fiscal measures to address rising food prices.

Lydia Jafiya, another committee member, attributed the current inflationary trends to a combination of monetary and structural factors. She emphasized the need for a balanced policy approach that includes both demand management and supply-side enhancements to stabilize prices and foster economic growth. She expressed confidence that targeted fiscal interventions would help moderate domestic prices and stimulate growth in the medium term.

To tackle food inflation, which exceeded 40% in June, the Federal Government announced a 150-day duty-free import window for essential food commodities, including maize, husked brown rice, wheat, and cowpeas. Additionally, the government authorized the importation of 250,000 metric tonnes each of wheat and maize in semi-processed form to support small-scale processors and millers. Other measures include setting Guaranteed Minimum Prices and facilitating the storage of surplus supplies in the National Strategic Food Reserve.

MPC member Murtala Sagagi highlighted that while the CBN’s tight monetary policy was yielding positive results, market imperfections and failures could lead to unintended outcomes, such as resource misallocation. He stressed the need for better alignment between monetary and fiscal policies to sustain the CBN’s efforts to achieve macroeconomic stability.

Sagagi also called for an overhaul of the NNPC to reduce inefficiencies and stabilize the exchange rate. He urged the government to reconsider its decision to increase ways and means financing to promote fiscal discipline and improve investor confidence.

CBN Governor Olayemi Cardoso echoed these sentiments, emphasizing the need for coordinated efforts between monetary and fiscal policies to fully address inflationary pressures and lay the groundwork for sustainable economic growth. He noted that while resolving non-monetary issues is crucial, the MPC must continue to take all necessary measures in the short term to curb inflation.

Aku Odinkemelu, another MPC member, pointed out that food inflation remains the primary driver of overall inflation, driven by legacy issues such as inadequate power supply, poor infrastructure, and insecurity in farming areas, as well as currency depreciation. She also highlighted the growth in money supply and credit, which has kept aggregate demand strong and exerted upward pressure on inflation. Odinkemelu stressed the importance of further tightening monetary policy to manage credit growth effectively.

The committee voted to increase the benchmark interest rate by 50 basis points, raising it to 26.75% from 26.25%. The MPC also adjusted the asymmetric corridor around the Monetary Policy Rate (MPR) to +500/-100 basis points from +100/-300 basis points, retained the cash reserve ratio for deposit money banks at 45%, and maintained the liquidity ratio at 30%.