By Chinwendu Obienyi

Till date, the implementation of monetary policy has been complicated by various factors like; fiscal profligacy, lack of operational autonomy of the central bank, insufficient and low quality statistics, weak mechanism and a weak financial system.

The objectives of the Nigerian monetary policy for decades have been the attainment of internal and external balance.

This was affirmed by the Central Bank of Nigeria (CBN)’s Monetary Policy Circular No. 33, 2002, which stated that one of the apex bank’s major objectives is the sustenance of price and exchange rate stability.

Reaffirming this, the CBN Governor, Olayemi Cardoso, at the Chartered Institute of Bankers’ of Nigeria (CIBN) forum last year, stated that his leadership will focus mainly on the core mandate of price stability.

The scope of this involves developing countries who have to find a balance between stabilising domestic prices and maintaining a fairly stable exchange rate. This is especially important for nations that are open and dependent on import because striking this balance is a common challenge faced by developing economies (like Nigeria) seeking economic stability and growth.

But despite the apparent continuity in objectives, Nigeria’s inflation experience has been somewhat mixed. For example, in Q2 1990, annual inflation averaged around 30 per cent but subsequently came down to one-digit rate at a time. However, since 2001, inflation is back in the two-digit rate territory, with an average of about 18 per cent over 2000–2002. Currently, the inflation rate is at 28.92 per cent.

One often cited explanation for Nigeria’s inflation performance rests with the weaknesses in its fiscal policy framework. Nigeria is an oil exporter and fiscal revenue throughout the past two decades has largely coincided with oil revenue. Naturally, oil revenue is very volatile due to wild oscillations in oil’s spot and future US$ price per barrel and to unpredictable changes in OPEC assigned oil quotas of which Nigeria has been a member since 1958 following the commercial  discovery of oil in Oloibiri, in Nigeria’s Rivers State, in 1956.

According to a paper titled; ‘Achieving and Maintaining Price stability in Nigeria’, prepared by Nicoletta Batini, absent suitable fiscal rules and a proper finance-management framework for oil-related risks, Nigeria’s variable oil and fiscal revenues in the 1980s and 1990s led to boom-and-bust-type fiscal policies that have generated large and unpredictable movements in government deposits and ways and means account.

Hence, it is no surprise that this has been a recurring source of liquidity surprises and has instilled volatility in Nigeria’s financial system. The combination of liquidity surprises with the ability of the federal government to finance large budget deficits by borrowing freely from the CBN at below market-clearing interest rates has severely impaired the apex bank.

Daily Sun had earlier reported that the apex bank’s lending to the government through its W&M have surged by 2,700 per cent in  years with inflationary pressure persisting despite the deployment of monetary policy tools.

Hence, the question that begs for an answer is what strategies can the apex bank employ to achieve price discovery and stability?

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The CBN recently stated that it has plans to include an inflation targeting mechanism that involves setting and communicating a specific inflation rate target using the policy rate, OMO bills, repo and reverse repo. However, finding coherence and alignment between the fiscal and monetary policy to stabilise prices may enable the achievement of statutory and policy targets for the year.

In its latest report on the Nigerian Economic Outlook released at the weekend, PwC Nigeria maintained that there are limitations of inflation targeting in developing countries which include; strength of transmission mechanism, policy autonomy of the CBN, lack of coordination between fiscal and monetary authorities and structural challenges which may include the size of the informal economy.

Furthermore, it stated that the CBN needs to manage inflation through its policy instruments, understand policy and inflation linkages, align exchange rate policies with inflation targets and ensure that fiscal and public debt management activities support the inflation target.

“Inflation targeting is a monetary policy approach wherein a Central Bank predicts and discloses a designated inflation rate target. Thus, for a successful inflation targeting, the CBN has to be transparent in its mandate of inflation pursuit, limit fiscal policy influence and government access to monetary policy authority credit, use market-based monetary instruments to develop and stabilise the financial system and address any infrastructural deficiencies,” the report said.

The report also noted that FX illiquidity challenges persisted due to limited foreign exchange inflows to the country. It said, “Other challenges include lower proceeds from crude oil inflows due to decline in oil production.

The average oil production from January to November stood at 1.25 mbpd, falling short of both the budgeted 1.69 mbpd and the OPEC crude oil production quota of 1.78 mbpd.

“Another challenge is the reduced FDI flows, capital importation declined by 43.6% to US$654.65 million in Q3 2023 from US$1,159.67 million in Q3 2022 due to several factors such as difficulty in funds repatriation abroad, insecurity, infrastructural deficit, etc.”

It also added that to address these issues, the CBN implemented various strategies aimed at attracting foreign exchange inflows, which include the continuous clearance of FX backlogs, liberalising the FX market and removing restrictions on 43 banned items from accessing FX, among other reforms.

“However, uncertainty in the FX environment may persist in 2024 if supply challenges are not met. Hence, the apex bank has to provide a transparent framework, ensure investors gain confidence and enable more price discovery. Clear communication builds trust and reduces uncertainty, creating an environment conducive to stable exchange rates and robust market dynamics,” PwC Nigeria said.

Corroborating the report, the Managing Director, APT Securities, Kurfi Garba, said that in order to be able to effectively achieve price stability, Nigeria must address a number of institutional and operational issues.

“These include designing a workable fiscal-monetary policy mix so the borrowing requirements of the government no longer dominate monetary policy decisions. This also include providing an adequate system of checks and balances to ensure CBN accountability; developing macroeconomic statistics that are timely and consistent; documenting the monetary transmission mechanism and operating measures that can strengthen transmission,” he said.