Hook: Nigeria’s economic struggles have been marked by a combination of high inflation, a volatile currency, rising debt, multidimensional poverty, gaping inequality, and unemployment. These challenges are compounded by external factors such as fluctuating oil prices, global economic instability, spiking geopolitical uncertainties, and other internal issues like poor infrastructure, policy mismatch, and insecurity. To address these issues, Nigeria has heavily relied on monetary policy measures, particularly through interventions by the Central Bank of Nigeria (CBN). These include adjustments to interest rates (or the monetary policy rate as referenced in Nigeria), exchange rate management, and forex interventions, all aimed at stabilising the economy and maintaining currency value.
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At the twilight of the 2023 general election and the subsequent swearing-in of elected public officers, the apex monetary authority—the CBN—experienced a shake-up following the summary dismissal of Mr. Godwin Emefiele on June 9, 2023, following his 9 years and 6 days stay in office. After a three-month vacuum of substantive leadership at the national financial powerhouse, President Tinubu appointed Dr. Olayemi Cardoso to assume office on September 22nd, 2023. While many Nigerians and other stakeholders expected the new-Cardoso-led regime to be swift in reform rollout using all its monetary policy arsenal, especially when it comes to reversing the economic fortunes of the nation, the inadequate cynosure on the fiscal policy side was disconcerting and worrying.
We, however, argued that monetary policy alone may not be sufficient to resolve the broader structural issues plaguing the economy. An analogy can be drawn to an “economic flight” attempting to take off with only one wing. Monetary policy represents just one aspect of economic management—while it may provide temporary stability, it cannot fuel sustained and inclusive growth without the support of fiscal policy, structural reforms, and long-term investments in critical sectors like infrastructure, technology, and manufacturing.
“While many Nigerians and other stakeholders expected the new-Cardoso-led regime to be swift in reform rollout using all its monetary policy arsenal, especially when it comes to reversing the economic fortunes of the nation, the inadequate cynosure on the fiscal policy side was disconcerting and worrying.”
In this byline, we aimed to analyse and explore whether Nigeria’s overreliance on monetary policy can lead to real inclusive growth and stability or if a more balanced approach, incorporating fiscal policy and structural reforms, is required to fully lift the economy out of the doldrums and drive sustainable development.
State of Nigeria’s economy
Nigeria’s economy faces persistent challenges, including slow GDP growth (around 2-3%), high inflation (almost 40%), and an unemployment plus underemployment rate of approximately 33 percent. Widespread poverty affects over 63 percent of the population, with a staggering 133 million multidimensionally deprived, further complicating the nation’s economic outlook.
The country remains heavily dependent on oil, accounting for over 90% of the country’s foreign exchange earnings and government revenue. While there have been efforts to diversify into non-oil sectors like agriculture, solid minerals, blue/marine economy, and telecommunications, progress has been slow due to weak infrastructure, inconsistent policies, and limited investment in non-oil areas.
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Global factors such as fluctuating oil prices, the COVID-19 pandemic, and geopolitical tensions have worsened Nigeria’s economic struggles. As a major oil exporter, Nigeria’s revenue and foreign exchange earnings are heavily reliant on oil prices. Volatile oil prices can lead to budgetary shortfalls and impact foreign reserves, complicating efforts to stabilise the economy. Additionally, the COVID-19 pandemic has resulted in long-lasting effects, disrupting trade and economic activities while global supply chain issues have led to shortages and inflationary pressures, exacerbating economic challenges.
These external pressures, along with increasing debt, underscore the need for deeper reforms to strengthen the economy and reduce its vulnerability. The acceleration of reforms rests on the twin wing of monetary policy and fiscal policy. However, it seems that the centre of attention has been only on monetary policy.
Monetary policy fundamentals and dynamics
Monetary policy refers to the regulatory measures taken by a central bank, such as the CBN, to manage inflation, interest rates, and maintain currency stability. Its core purpose is to control the supply of money in the economy, influence economic activity, and ensure price stability. In Nigeria, the CBN has been actively using monetary policy to address rising inflation, stabilise the value of the naira, and manage interest rates to attract foreign investments and ensure financial stability.
Recent monetary policies implemented by the CBN include exchange rate adjustments to address forex shortages through the NAFEM and NAFEX windows, multiple interest rate hikes to curb inflationary pressures, and direct interventions in the foreign exchange market to stabilise the naira. These interventions were aimed at mitigating the effects of currency devaluation, restoring investor confidence, and addressing inflationary concerns, particularly after the removal of petrol subsidies and naira devaluation. However, these measures often serve as short-term solutions to broader economic challenges.
The limitations of relying solely on monetary policy
While monetary policy plays a critical role in controlling inflation and maintaining currency stability, it has limitations, especially when used in isolation. Although the CBN’s interventions have helped to stabilise the naira and manage inflationary pressures to some extent, monetary policy alone cannot address deeper structural problems in the Nigerian economy. Issues like unemployment, poor infrastructure, low industrial productivity, and underdeveloped sectors require more than interest rate and forex management to resolve.
Over-reliance on monetary policy may also stifle broader economic reforms and delay much-needed fiscal adjustments. For example, excessive focus on currency interventions and inflation control can neglect critical reforms such as diversifying the economy away from oil dependence, addressing infrastructure gaps, and promoting industrial growth. As a result, the economy risks stagnating with limited job creation, weak fiscal capacity, and underdeveloped sectors, highlighting the need for a balanced approach that incorporates both fiscal policy and structural reforms for long-term growth.
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The missing wing: fiscal policy and structural reforms
While monetary policy plays a key role in stabilising inflation and currency value, fiscal policy is equally crucial for driving long-term economic growth. Effective fiscal measures, such as efficient budgeting, revenue generation, and targeted government spending, are necessary to complement monetary policy in achieving sustainable development.
Nigeria’s fiscal situation is currently strained by persistent budget deficits, rising public debt (exceeding ₦77 trillion as of mid-2023), and low tax revenues, with a tax-to-GDP ratio of about 6 percent, which is one of the lowest globally. This fiscal imbalance hampers the government’s ability to invest in critical infrastructure and public services.
In addition to fiscal challenges, structural reforms in sectors like agriculture, manufacturing, and infrastructure are urgently needed. These reforms would enhance productivity, reduce the country’s heavy reliance on imports, and create a more diverse, resilient economy. Addressing these structural bottlenecks is essential to complement monetary policy and propel Nigeria toward sustained economic growth.
Nigeria’s economy is significantly affected by global economic forces, including fluctuations in oil prices, the ongoing recovery from COVID-19, and disruptions in supply chains. As a major oil exporter, Nigeria’s revenue and foreign exchange earnings are heavily reliant on oil prices. Volatile oil prices can lead to budgetary shortfalls and impact foreign reserves, complicating efforts to stabilise the economy. Additionally, the COVID-19 pandemic has resulted in long-lasting effects, disrupting trade and economic activities while global supply chain issues have led to shortages and inflationary pressures, exacerbating economic challenges.
Domestically, Nigeria faces numerous issues that hinder the effectiveness of monetary policy in isolation. Insecurity, particularly in regions plagued by violence and unrest, discourages investment and disrupts economic activities. Furthermore, poor infrastructure limits productivity and raises operational costs for businesses, making it difficult for them to thrive. Additionally, a challenging business environment characterised by regulatory bottlenecks and high operational costs further complicates economic recovery. These local pressures necessitate a multifaceted approach that combines both monetary and fiscal policy responses to create a more conducive environment for economic growth. Bottom of Form.
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BDI commentaries: Charting a path for a balanced approach
To achieve sustainable economic growth in Nigeria, a coordinated policy framework that effectively balances both monetary and fiscal measures is essential. Relying solely on monetary policy can lead to temporary relief but will not address the structural issues that plague the economy. Therefore, an integrated approach that harmonises these two areas can provide a more robust solution to Nigeria’s economic challenges.
One critical suggestion for improving fiscal responsibility is enhancing the efficiency of government spending and ensuring that public funds are directed toward high-impact sectors. This includes investing in infrastructure development, which can significantly improve productivity and attract foreign investments. Additionally, boosting government revenue through broadening the tax base and enhancing tax compliance can provide the necessary funds for essential services and development projects. Investing in human capital through education and vocational training is vital to equip the workforce with skills that meet the demands of a modern economy, ultimately fostering innovation and growth.
Countries like Rwanda and Singapore provide compelling case studies of successful policy combinations. Rwanda has effectively implemented reforms that integrate fiscal discipline with strategic investments in technology and human capital, resulting in remarkable economic growth. Similarly, Singapore’s blend of prudent fiscal policies, investments in infrastructure, and a focus on education has transformed its economy into a global hub. These examples illustrate that a balanced approach can yield positive outcomes, enabling countries to navigate challenges and drive sustainable growth.
About the authors:
Fashola is a junior research and data analyst at BusinessDay Intelligence. He possesses a strong background in conducting financial evaluations and economic analysis.
Muhammad (PhD in View) is a Senior Research and Data Analyst at BusinessDay Intelligence. He has over seven years of quality analytical experience on issues related to the economy, finance, and human capital development.
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