By Ummie Kabir
For decades, economists and policy analysts in Nigeria have made one consistent recommendation: the monetary and fiscal authorities must work together—not merely through occasional engagements or press releases, but through structured and sustained coordination that aligns the country’s economic management tools toward stability, growth and improved prosperity for Nigerians.
Fiscal policy, driven largely by the Ministry of Finance, focuses on government spending, taxation and borrowing to promote economic growth and development. Monetary policy, under the Central Bank of Nigeria (CBN), focuses primarily on price stability and the soundness of the financial system.
For years, however, the two arms often appeared to operate on parallel tracks, and at times in opposite directions. The consequences included persistent inflation despite tight monetary policy, elevated interest rates amid fiscal expansion, and pressure on the naira despite substantial oil revenues.
A major manifestation of this disconnect was fiscal dominance. While the CBN raised the Monetary Policy Rate (MPR) to reduce liquidity and anchor inflation expectations, expansionary fiscal operations could inject liquidity through large FAAC disbursements and deficit spending.
The Ways and Means facility, through which the CBN financed government deficits, became one of the clearest examples, with outstanding advances rising to more than N23 trillion. Such monetary financing can expand the money supply, fuel inflationary pressures, weaken the currency through expectations and undermine central bank independence.
That dynamic, however, appears to be giving way to greater coordination between the fiscal and monetary authorities.
The emerging framework for closer collaboration could become one of the significant reforms in Nigeria’s current economic management if it is sustained and institutionalised. Greater coordination has the potential to make the work of both authorities more effective.
Under such an arrangement, fiscal policy would be designed with greater consideration for the inflation outlook, while the CBN would have clearer visibility into the timing and magnitude of government spending and borrowing.
When government spending increases, better communication enables the monetary authority to anticipate and manage its liquidity implications. Similarly, when the CBN tightens monetary policy, fiscal operations can be calibrated to avoid unnecessarily undermining the intended effect.
The result is greater policy effectiveness: monetary tightening can have its intended impact, while fiscal interventions can support growth without being immediately offset by monetary pressures.
A critical element of the framework is adherence to the Fiscal Responsibility Act 2007 and the provisions of the CBN Act governing temporary advances to the Federal Government.
The CBN Act limits such advances to 5 per cent of the previous year’s actual revenue and provides for their repayment within the stipulated period. Respect for these statutory limits is essential to preventing excessive deficit monetisation.
Greater reliance on transparent, market-based financing through instruments such as Federal Government bonds and Treasury bills can also improve fiscal transparency and debt management.
Improved fiscal discipline could, over time, contribute to a reduction in sovereign risk and borrowing costs. Lower risk premiums would create greater fiscal space for productive capital expenditure, which generally has stronger long-term growth effects than recurrent spending.
Tackling inflation from both sides
Nigeria’s inflation challenge is not purely monetary. It also has structural dimensions, including production constraints, infrastructure deficits, insecurity, import dependence and disruptions in energy supply.
The CBN alone cannot resolve these challenges through interest-rate increases.
A coordinated approach allows fiscal authorities to address structural constraints through investments in infrastructure, agriculture, transportation and security, while the CBN focuses on price stability, liquidity management and financial-system stability.
Such coordination could help reduce inflationary pressures without relying exclusively on higher interest rates—an outcome that would be significant for manufacturers seeking affordable credit, farmers requiring financing and households whose purchasing power has been eroded by rising prices.
Strengthening the naira and investor confidence
The relationship between fiscal management and foreign-exchange stability is equally important.
Greater coordination between fiscal dollar inflows and the CBN’s management of external reserves can improve the predictability of foreign-exchange policy. When oil revenues are strong, prudent fiscal savings can strengthen the government’s capacity to withstand periods of weaker revenues, while the CBN can deploy reserves strategically to manage excessive volatility rather than defend an unsustainable exchange-rate level.
For investors, consistency between fiscal and monetary authorities sends an important signal about policy predictability.
Predictability is particularly important for attracting long-term investment, as businesses require confidence that major economic policies will not move abruptly in conflicting directions.
Targeted interventions and inclusive growth
Policy coordination can also support targeted government interventions in areas such as student financing, consumer credit, compressed natural gas (CNG) transportation and agricultural support.
The CBN and other financial institutions can complement such interventions through appropriate development-finance mechanisms, provided the programmes are properly targeted and do not generate excessive liquidity or inflationary pressures.
Where government programmes are supported by sustainable revenues and transparent financing rather than excessive money creation, they can contribute to broader economic participation while limiting their inflationary impact.
From agreement to institution
However, monetary-fiscal coordination should not remain a series of meetings or symbolic agreements.
It should be institutionalised through a formal coordination mechanism, such as a Monetary-Fiscal Coordination Committee, with regular meetings, real-time data sharing and, where appropriate, joint public communication on major economic policy decisions.
The law must also remain central to the process.
The provisions of the Fiscal Responsibility Act and the CBN Act should be treated as binding safeguards for fiscal and monetary discipline, rather than optional guidelines.
Ultimately, the benefits of monetary-fiscal coordination go beyond lower inflation or a more stable naira. They include greater policy consistency, improved debt management, stronger investor confidence and a more predictable economic environment.
Nigeria’s economic challenges are too interconnected for fiscal and monetary policy to operate in isolation. When the two arms of economic management work toward common objectives, each can reinforce rather than undermine the other.
Flourishing economies are not built by one hand clapping. Both hands must clap together.
