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Members of the Monetary Policy Committee of the Central Bank of Nigeria have expressed concerns that some fiscal policies were hampering the efforts to rein in inflation in the country.
This was contained in their statements at the July meeting, which was published on the website of the CBN on Tuesday.
Some of the members of the MPC also stated that the current money supply of N4.05tn had increased credit facilities and put upward pressure on inflation.
They maintained that it was hard to get the desired results if fiscal and structural policies were either not in place or were countering the tightening measures of the CBN.
They added that further tightening of monetary policy was essential to curtail credit growth
One of the members, Aloysius Ordu, submitted that the balancing act facing the MPC was difficult in the best of times and far much more difficult when other policies – structural and fiscal – were not entirely pulling their weights.
“The monetary policy measures taken thus far are severely hemmed in by fiscal stresses that are making it difficult for monetary policy to do its job. Now more than ever, monetary policy needs much more help from fiscal and structural policies.
“In this regard, the government’s recent mandate that the NNPC should sell 450,000 barrels of crude oil per day directly to the Dangote and other local refineries is a welcome development, estimated to save over $7bn in foreign exchange.
“Second, an intense drive to clamp down on oil theft and vandalism, bring marginal oil fields into production, and reactivate dormant wells could raise oil production to the 1.78 million barrels per day assumed in the 2024 federal budget. Third, with tax revenues constituting less than 8 per cent of GDP, it is worth repeating that Nigeria urgently needs to fix the structural weaknesses of our tax system,” he stated.
According to Ordu, these measures combined with a commitment to reduce the overall cost of governance will dampen fiscal pressures and bolster the effectiveness of monetary policy. “Clearly, it matters that fiscal expectations are anchored. Indeed, our ability to control inflation and influence real economic activity rests fundamentally on fiscal behaviour and Nigerian’s expectations of appropriate fiscal behaviour. Otherwise, the task of monetary policy in controlling inflation and stabilising real economic activity is much more difficult,” he said.
He went on to vote for a hold in the policy rate.
For Bala Bello, to consolidate on the gains recorded so far, it is pertinent that monetary policy remains on course with the tight stance to curb monetary-induced inflation while complementary fiscal measures are being explored to stem the hike in food prices.
Another member of the MPC, Lydia Jafiya, opined that the current inflationary trend was propelled by a mix of monetary and structural factors.
“Hence, there is a need to implement an optimal policy blend that combines demand management and supply-side enhancement measures to stabilise the general price level and boost economic growth,” adding, “I am confident that these fiscal interventions would lead to domestic price moderation and spur growth momentum in the near to medium term.”
To address the food inflation, which was over 40 per cent in June, the Federal Government announced a 150-day duty-free import window for food commodities particularly (maize, husked brown rice, wheat, and cowpeas) and importation of 250,000 metric tonnes of wheat and 250,000 metric tonnes of maize in their semi-processed form for supply to small scale processors and millers.
Other measures include stakeholder engagements to set Guaranteed Minimum Prices and facilitate storage of excess supply in the National Strategic Food Reserve.
Also, Murtala Sagagi, who is a member of the MPC, averred that while the tight monetary stance of the bank was yielding positive results, market imperfections and market failures abound and could lead to unintended outcomes in terms of distortions in resource allocation.
He noted that this may lead to sub-optimal performance of the conventional policies deployed, especially in the face of fiscal dominance.
“Therefore, an alignment of monetary policies with fiscal interventions is critical in sustaining the CBN’s consistent efforts to attain macroeconomic stability. This is more so because improvements in government expenditure, interest rate, inflation, exchange rate, money supply and export could fast-track economic growth in Nigeria.
“Achieving a balanced approach, however, remains a challenge because the dynamics and unstable nature of the Nigerian economy make conventional tools less effective and modelling solutions particularly difficult. Nevertheless, constant evaluation of policy actions to determine effectiveness in terms of outcomes and impact on the general economic health of the country should inform policy decisions.
“Recent experiences in developed and developing countries suggest that improved policy coordination will help achieve a good mix of orthodox and heterodox policies to achieve stability and fast track inclusive growth. This suggests that efforts aimed at reducing excess liquidity should extend beyond rate hikes. By so doing, the Bank’s tight monetary stance can be sustained, investor confidence enhanced and the flow of finance to the real sector achieved,” he said.
Sagagi recommended the immediate overhaul of the NNPC, saying, “To reduce inefficiencies and enhance inflows to stabilise the exchange rate, FG to consider reversing its decision to increase ways and means to promote fiscal discipline and improve investor confidence among others.”
The Governor of the CBN, Olayemi Cardoso, said that 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 within its power in the short run, to curb inflationary pressure,” he stated.
Meanwhile, one of the MPC members, Aku Odinkemelu, said, “I understand that the major driver of inflation is food inflation, which is largely driven by legacy issues such as inadequate power supply, poor road networks, and high insecurity in farming communities, as well as currency depreciation.
“Third is the growth in the money supply. Credit has continued to grow, thus keeping aggregate demand relatively strong and putting upward pressure on inflation. Further tightening of monetary policy is essential to curtail credit growth.
“The massive injection of the naira into the economy through ways of means totalling N22.7 trillion in 2023 created unprecedented economic dislocation. With the eventual free fall of the naira after the removal of fuel subsidy and the deregulation of exchange rates, the CBN had limited options but to embrace conventional monetary policy tools to ensure price and exchange rate stability and restore domestic and international confidence in the economy.”
The meeting voted to increase the benchmark rate by 50 basis points to 26.75 per cent from 26.25 per cent.
Also, MPC adjusted the asymmetric corridor around the MPR to +500/-100 from +100/-300 basis points, retained the cash reserve ratio of deposit money banks at 45 per cent and Merchant Banks at 14 per cent and the liquidity ratio at 30 per cent.
