A member of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC), Murtala Sabo Sagagi, has identified excessive government spending as a major obstacle to effective monetary policy implementation in Nigeria
According to Sagagi in the newly released personal statements of MPC members after the 298th meeting, the inability to control fiscal expenditures continues to weaken the transmission of monetary policy measures, making inflation and exchange rate stability difficult to achieve.
In his personal statement at the MPC’s November 2024 meeting, Sagagi highlighted how structural rigidities, weak institutions, and the unabated use of cash by both the government and the public contribute to Nigeria’s economic challenges.
Sagagi said, “The legacy issues that constrained the sustainable growth of the Nigerian economy are yet to be overcome even with the massive reforms implemented by the government. The structural rigidities, geopolitical tensions, excessive government spending, unabated use of cash by the government and populace as well as weak institutions continue to limit policy transmission mechanisms and present challenges to the achievement of Nigeria’s ambition towards a one trillion dollar economy.”
He stressed that despite the monetary tightening measures implemented by the CBN, fiscal indiscipline undermines these efforts, limiting their effectiveness in stabilising the naira and curbing inflation.
“The excess spending by the government is one of the biggest monetary policy challenges in the country,” he added.
Fiscal-Monetary coordination essential for stability
Sagagi pointed out that while the CBN has continued to implement policies aimed at ensuring price and foreign exchange stability, these policies can only be effective if complemented by sound fiscal discipline.
“The efficacy of the policies largely depends on effective fiscal-monetary policy coordination,” he stated. He warned that Nigeria’s ambitious target of achieving a one-trillion-dollar economy could remain elusive if structural bottlenecks and excessive spending are not addressed.
He noted that Nigeria’s high inflation is due to a mix of fiscal mismanagement and external pressures, including geopolitical tensions and global inflationary trends.
Inflation persistence and the need for aggressive measures
Philip Ikeazor, another MPC member and CBN’s Deputy Governor for Financial System Stability shared similar concerns regarding the country’s fiscal challenges.
He noted that despite the CBN’s tight monetary stance, inflation has remained stubbornly high.
Ikeazor said, “In the last MPC, I provided forward guidance on the intention to support a hike in rates if the fiscal actions of the Sub-national Governments continue to weaken the effective transmission of monetary policy.
“The support for a hike at this time was also meant to counteract the consequences of the frequent fiscal injections by the Sub-national Governments which research has shown to be a major source of inflation persistence in the economy.“
He called for a more aggressive approach to curb inflationary pressures in the near term, voting for a 50-basis-point increase in the Monetary Policy Rate (MPR).
He was the only MPC member who called for an increase of 50 basis points as the majority opted for 25 basis points, eventually adopted unanimously.
Ikeazor emphasised that inflationary pressures persist due to a combination of prolonged fiscal imbalances, high government spending, and external shocks. He cautioned that the economy could face greater instability if decisive actions are not taken to curb excess liquidity and improve fiscal discipline.
Despite attempts at revenue mobilisation, Ikeazor stressed that excessive government spending, particularly on recurrent expenditures, continues to strain the country’s fiscal position. He called for a restructuring of government expenditure towards more capital investment to enhance productivity and economic resilience.
What you should know
- To address these challenges, both Sagagi and Ikeazor urged the federal government to enhance fiscal prudence, reduce recurrent expenditures, and adopt policies that improve domestic productivity.
- Sagagi recommended a stronger alignment between monetary and fiscal policies to ensure that efforts to stabilise inflation and the exchange rate are not counteracted by unchecked government spending.
- Meanwhile, Ikeazor advocated for more decisive monetary policy actions to curb inflation and maintain economic stability. He noted that while monetary tightening has come at the expense of economic growth, it remains necessary to restore macroeconomic stability and investor confidence.
- The CBN has scheduled its 299th MPC meeting for Monday, February 17 and Tuesday, February 18, 2025.
