Five policy missteps between 2015 and 2023 responsible for high inflation in Nigeria

The World Bank has documented a series of macroeconomic policy missteps by fiscal and monetary authorities between 2015 and 2023 that pushed Nigeria’s inflation to a 28-year high.

In its latest edition of the Nigeria Development Update (NDU), the global lender explained that before 2015, Nigeria had a single-digit inflation rate, which is in the same range as other emerging economies.

According to the Bank, these macroeconomic missteps include the financing of fiscal deficits by the Central Bank of Nigeria (CBN), the provision of large credits at subsidized rates to households and businesses also by the Central Bank of Nigeria, the ban access to foreign currency for households and businesses. importation of more than 900 products, the cost of maintaining an overvalued exchange rate and unbudgeted budget deficits.

The report stated: “Starting in 2015, however, the CBN shifted its focus from price stability – its core mandate – ostensibly towards growth objectives, extending large amounts of credit to households and businesses at subsidized rates, as well as prohibiting access to foreign currency to import more than 200 million euros. 900 product ranges.

Large, unbudgeted budget deficits, as well as the costs associated with maintaining an overvalued exchange rate,

monetary policy is increasingly subject to the financing of budgetary deficits, in particular through the monetization of the deficit thanks to progress in ways and means.

The World Bank further noted that the huge ways and means put forward by the CBN resulted in large liquidity circulation, which weakened confidence in the naira and contributed to soaring inflation even before the start of reforms in the foreign exchange and energy sector. peaked at a 28-year high of 24.19% in June 2024, marking 19 months of steady increase.

Reversal of previous CBN policies

During the era of the now embattled former governor, Godwin Emefiele, the Central Bank of Nigeria was known for its significant financing of private sector development, to the tune of trillions of naira. The current governor, Yemi Cardoso, estimates the total amount of development financing provided by the central bank at N10 trillion.

Furthermore, the current management of the CBN has stopped funding fiscal interventions, saying the apex bank does not have the capacity to carry out such interventions.

The new CBN management also reversed other policies of its predecessors, such as banning access to foreign exchange for specific products. Last year, the CBN lifted the forex ban on 43 items that were previously banned from the official foreign exchange market.

Furthermore, the major change introduced by the Yemi Cardoso-led Central Bank is the unification of the different segments of the foreign exchange market which has seen the Naira lose over 100% of its value since June 2023 when it was promulgated.

On the fiscal front, the Minister of Finance, Chief Wale Edun, said the Federal Government would not resort to ways and means financing to cover the budget deficit, unlike the previous administration which borrowed over 22 trillion of naira within the framework of ways and means, beyond the provisions provided for. of the Fiscal Responsibility Act (FRA).