Fiscal-monetary policy pact comes late as Nigeria battles inflation, high borrowing

By Marcel Okeke

The recent agreement between the Federal Government and the Central Bank of Nigeria (CBN) to strengthen coordination between fiscal and monetary policies has been described as a belated intervention, coming after years of policy divergence that have constrained Nigeria’s economic growth.

The Ministry of Finance and the CBN recently signed a Memorandum of Understanding (MoU) providing for regular consultation, information sharing and joint assessment of economic policies.

Under the arrangement, both institutions are expected to coordinate their approaches to inflation management, government borrowing, liquidity management and private-sector access to credit.

Minister of Finance and Coordinating Minister of the Economy, Taiwo Oyedele, said the agreement was designed to institutionalise cooperation between fiscal and monetary authorities rather than leave policy coordination to the individuals occupying public offices.

According to Oyedele, government borrowing affects liquidity and interest rates, while monetary policy influences government financing costs. He also noted that tariffs and exchange rates affect prices and government revenue, while public spending influences aggregate demand.

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CBN Governor Olayemi Cardoso similarly said the framework would help align the actions of both institutions, reduce policy conflicts and support the pursuit of common economic objectives.

However, economist and former Chief Economist of Zenith Bank Plc, Dr Marcel Okeke, argued that the initiative had come too late to provide significant relief to an economy already facing multiple challenges.

Okeke said the disconnect between monetary and fiscal policies had been a longstanding problem in Nigeria, particularly during the administration of President Bola Tinubu.

He argued that while the CBN had maintained a tight monetary stance through measures such as high monetary policy rates and cash reserve requirements, the fiscal authorities had continued to borrow heavily and increase government spending.

According to him, the contrasting approaches had contributed to liquidity-management challenges and increased competition between government and private-sector borrowers for available funds.

He said extensive government borrowing through bonds, treasury bills and other instruments had also contributed to the crowding out of private businesses seeking credit.

Okeke further criticised the sequencing of some of the administration’s economic reforms, particularly the removal of petrol subsidy and the subsequent liberalisation of the foreign-exchange market.

He argued that implementing major reforms without sufficient coordination and sequencing contributed to the sharp depreciation of the naira, rising inflation and declining consumer purchasing power.

The economist maintained that better coordination between fiscal and monetary authorities could have enabled the government to cushion the immediate effects of major reforms and improve their implementation.

He also questioned the need for a new MoU, arguing that Nigeria already had an institutional framework for coordinating financial-sector regulators through the Financial Services Regulation Coordinating Committee (FSRCC).

Established in 1994, the FSRCC brings together agencies including the CBN, Ministry of Finance, Nigeria Deposit Insurance Corporation, Securities and Exchange Commission, National Insurance Commission, National Pension Commission, Corporate Affairs Commission and Financial Reporting Council of Nigeria.

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Okeke argued that a more effective use of the existing mechanism could have strengthened policy coordination without creating another framework.

He also questioned the effectiveness of the CBN’s tight monetary policy in bringing inflation under control, while noting its impact on businesses facing high borrowing costs.

According to him, local businesses have continued to contend with an unfavourable operating environment, while high interest rates have restricted access to credit and investment.

He further identified insecurity, food-supply disruptions, political spending and election-related pressures as factors capable of sustaining inflationary pressures despite monetary tightening.

Okeke said the challenges confronting the Nigerian economy extend beyond monetary policy, affecting sectors including energy, agriculture, manufacturing, education, healthcare, transportation, aviation and tourism.

He therefore described the new fiscal-monetary coordination framework as insufficient on its own to address the scale of the country’s economic difficulties.

The economist concluded that while stronger coordination between the CBN and fiscal authorities was necessary, its effectiveness would ultimately depend on how consistently the two institutions synchronise policy decisions, borrowing, spending, liquidity management and structural reforms.