Excessive govt spending undermining monetary policy – MPC member

A member of the Central Bank of Nigeria’s Monetary Policy Committee, Murtala Sagagi, says excessive government spending is a major challenge to effective monetary policy in Nigeria.

According to Sagagi, the inability to control fiscal expenditure continues to undermine monetary policy measures, making inflation and exchange rate stability difficult to achieve.

In his personal statement following the 298th MPC meeting, Sagagi highlighted structural rigidities, weak institutions, and the persistent use of cash by the government and the public as key contributors to Nigeria’s economic challenges.

He noted that despite the extensive reforms implemented by the government, legacy issues continue to constrain economic growth.

He warned that unless these obstacles were addressed, Nigeria’s ambition of becoming a one-trillion-dollar economy would remain a distant goal.

Sagagi said that while the CBN had consistently introduced policies to stabilise prices and the foreign exchange market, the impact of these measures was being eroded by fiscal indiscipline.

“The excess spending by the government is one of the biggest monetary policy challenges in the country,” he said.

He emphasised that without improved coordination between fiscal and monetary authorities, efforts to rein in inflation and stabilise the naira would continue to fall short.

“The efficacy of the policies largely depends on effective fiscal-monetary policy coordination,” Sagagi said.

Another MPC member, Philip Ikeazor, who is also the Deputy Governor for Financial System Stability at the CBN, shared similar concerns over the country’s fiscal challenges.

He said despite the CBN’s monetary tightening, inflation remained high due to the actions of subnational governments.

He explained that fiscal injections by state governments had been a major driver of inflation persistence and warned that if left unchecked, these interventions could worsen inflationary pressures.

Ikeazor said he had previously indicated support for a rate hike if the fiscal activities of state governments continued to weaken monetary policy transmission.

 He said, “In the last MPC, I provided forward guidance on the intention to support a hike in rates if the fiscal actions of the subnational 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 subnational governments, which research has shown to be a major source of inflation persistence in the economy.”

At the November meeting, he voted for a 50-basis-point increase in the monetary policy rate, arguing that a more aggressive approach was necessary to curb inflation.

However, the majority of MPC members opted for a 25-basis-point hike, which was ultimately adopted.

He stated that Nigeria’s inflationary pressures stem from prolonged fiscal imbalances, high government spending, and external shocks.

He stressed that without decisive measures to control excess liquidity and improve fiscal discipline, the economy could face further instability.

He called for a shift in government spending towards capital investment to boost productivity and enhance economic resilience.

Both Sagagi and Ikeazor urged the federal government to exercise greater fiscal prudence, reduce recurrent expenditures, and implement policies to improve domestic productivity.

Sagagi advocated for stronger alignment between monetary and fiscal policies to prevent monetary tightening efforts from being undermined by unchecked spending.

Ikeazor, on the other hand, called for more decisive monetary policy actions to curb inflation and stabilise the economy.

He acknowledged that monetary tightening had slowed economic growth but maintained that it was necessary to restore macroeconomic stability and investor confidence.

The CBN has scheduled its next MPC meeting for Monday, February 17, and Tuesday, February 18, 2025.