A recent report by Afrinvest (West) Africa Limited highlights a critical issue affecting the effectiveness of the Central Bank of Nigeria’s (CBN) policies: the misalignment of fiscal and monetary policies. This mismatch, according to the firm, was responsible for the weak transmission of the CBN’s policies, ultimately impeding Nigeria’s economic growth and development.
The report emphasizes the importance of aligning fiscal and monetary policies to achieve optimal economic outcomes, noting that fiscal imprudence can constrain monetary policymakers and weaken the impact of monetary policy.
“While we applaud the firm resolve of the CBN leadership toward achieving its objectives, we are concerned that the much-touted fiscal-monetary policy synergy, which even Dr. Cardoso referenced in his keynote speech as a critical success factor, has been largely nonexistent or, at best, requires more firepower.
“We believe this misalignment is largely responsible for the weak transmission of many of the CBN’s policies aimed at curbing inflation and stabilizing FX volatility in the past year,” the firm stated.
For instance, despite the CBN’s aggressive policy tightening—including a 12.5 percentage point increase in the Cash Reserve Ratio (CRR) to 45.0 percent and a 15.0 percentage point reduction in the Loan-to-Deposit Ratio (LDR) to 50.0 percent—credit to the private sector grew by 27.5 percent in the 12 months to September 2024, down from 46.9 percent in the previous year. However, credit to the government expanded sharply by 89.8 percent (previously -3.0 percent) to N42.0 trillion.
Against this backdrop, the broadest measure of money supply (M3) grew by 62.8 percent to N109.0 trillion, surpassing the 35.7 percent growth recorded in the 12 months preceding Dr. Cardoso’s appointment. Afrinvest attributed this surge in government credit, which allocated 79.6 percent of its budget to consumption (recurrent expenditure and debt servicing) between January and August, to a misalignment with the CBN’s anti-inflationary goals. This aligns with Milton Friedman’s assertion that inflation results from a more rapid increase in money supply than in output.
Additionally, the report noted that FX volatility often intensifies within three days of FAAC disbursement. Legacy issues, such as underperformance in the fiscal sector, productivity challenges, and weak export earnings, exacerbate FX instability and high inflation.
For the CBN’s efforts to enhance confidence in the business environment to yield long-term benefits, Afrinvest urged fiscal authorities to address business environment risks, reduce public sector bureaucracy, and combat corruption by empowering relevant institutions.
Shifting focus, the Debt Management Office (DMO) recently announced that the Federal Government raised $2.2 billion through Eurobonds with two maturities—6.5 years and 10 years—at stop rates of 9.625 percent and 10.375 percent per annum. This new borrowing, valued at approximately N3.7 trillion, is intended to finance the 2024 fiscal deficit. However, the borrowing is 2.1 times the size of foreign borrowing budgeted for 2024 in Naira (N1.8 trillion).
With actual revenue for January–August totaling N12.7 trillion, 35.4 percent short of the pro-rata amount (N17.3 trillion), Afrinvest warned that the actual deficit for the year could exceed the budgeted N9.2 trillion by at least 72.8 percent if the full expenditure plan of N35.1 trillion is implemented.
As of H1 2024, Nigeria’s total public debt stock reached N134.3 trillion, up from N98.7 trillion at the end of 2023, with external debt accounting for 46.9 percent. Debt-to-GDP is now estimated at 56.8 percent, surpassing the 55.0 percent sustainable threshold for low-income countries set by the IMF and World Bank.
Despite these challenges, a record N47.9 trillion expenditure plan has been proposed for 2025, even as weak global crude oil demand and business environment challenges persist. To improve fiscal capacity in the short term without exacerbating the debt burden, Afrinvest recommended measures such as securing oil and mineral assets from sabotage, privatizing inefficient public assets like refineries, and eliminating non-essential recurrent budget items.
For long-term fiscal sustainability, the report advised implementing business environment reforms, strengthening anti-corruption agencies to recover looted public resources, and promoting private sector-led infrastructure development.
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