A member of Nigeria’s Monetary Policy Committee (MPC), Murtala Sabo Sagagi, has addressed the limitations of monetary policy in addressing the nation’s escalating inflation amidst structural challenges.
Sagagi pointed out that the underlying structural issues within the Nigerian economy significantly hinder the traditional monetary policy tools from achieving desired outcomes on inflation control.
This is according to his statement during the MPC meeting, which was held between February 26 and 27, 2024, released by the Central Bank of Nigeria (CBN).
Structural Challenges Overshadowing Monetary Policy
He delineated several past policy missteps and structural inefficiencies that have led to the current economic instability.
These include the excessive use of ways and means that undermined the monetary policy stance particularly in the years 2021 and 2022, large-scale sectoral funding by the CBN without adequate due diligence, and the ill-conceived Naira redesign policy executed towards the end of 2022, whose adverse effects lingered into the second half of 2023.
Sagagi also emphasised that without addressing key issues such as insecurity, food shortages, and a comprehensive roadmap for economic and social rejuvenation, any monetary policy adjustments would have a minimal impact on inflation rates. He highlighted the country’s struggle with food inflation, which is predominantly structural and not monetary, as a significant contributor to the overall inflationary pressures.
He said:
- “It is my view that monetary policy consideration (i.e. readjustments) will have limited impact on inflation rates unless they are complemented with efforts to address insecurity and food shortages.
- “This is in addition to a holistic and disciplined roadmap for economic and social rejuvenation.”
The MPC member also shifted the focus from external factors like the Russia-Ukraine conflict to domestic policy inadequacies and internal structural rigidities as the primary causes of price instability in Nigeria.
He noted:
- “I would be more inclined to ascribe the current price instability to (a) domestic policy inadequacies and (b) internal structural rigidities rather than any external factors such as the prolonged Russia-Ukraine conflict and other global volatilities.
- “This does not, however, imply that global dynamics are inconsequential.”
The way forward
Emphasising Nigeria’s record-high inflation rates, Sagagi expressed scepticism towards traditional monetary policy adjustments, such as tweaking the Monetary Policy Rate (MPR), to achieve short-term stability.
He attributed the policy’s past inefficacy to several factors, including a disconnect between the banking sector and the real economy, limited access to formal loans for small and medium enterprises (SMEs), and the predominantly structural nature of food inflation.
Sagagi proposed a multifaceted approach to tackle inflation, stressing the importance of addressing food and energy components.
He stressed that:
- “Evidently, structural factors would continue to limit transmission of monetary policy in Nigeria. To achieve a balanced approach, it may be wise for the Bank to consider it worthy and strategic to initiate strategic partnerships to develop an effective framework for dealing with the major components of inflation in Nigeria, namely food and energy.”
To devise a comprehensive framework, he advocated for strategic partnerships between the bank, various ministries, departments, agencies (MDAs), and the private sector.
Other recommendations include finalising and implementing a medium-term strategy targeting inflation, kickstarting the National Agricultural Technology and Innovation Policy (NATIP) 2022-2027, achieving energy security by 2030, developing export-oriented industries, maintaining strict supervision over crypto operations and banks, managing concentration risks in lending to the real sector, improving logistics efficiency, enhancing transparency in public finance, and prioritising employment and enterprise development for the youth and women.
Sagagi also highlighted the need for a disciplined economic and social roadmap, emphasising the pivotal role of structural reforms in enabling effective monetary policy transmission.
