Fiscal, monetary coordination deepens as Nigeria battles inflation

Nigeria’s fiscal and monetary authorities have formally committed to closer coordination on inflation, borrowing, liquidity and foreign exchange management. Whether the new arrangement changes existing conditions will depend less on the memorandum itself than on how government spending, borrowing and monetary decisions are coordinated, Sami Tunji writes.

For much of Nigeria’s recent economic history, the government and the Central Bank of Nigeria have frequently found themselves fighting the same economic fires from opposite ends.

While the CBN tightened liquidity and raised interest rates to contain inflation, the fiscal authorities continued to spend and borrow to finance widening budget deficits. As the apex bank sought to reduce excess money in circulation, government financing needs competed with businesses for funds in the domestic market.

The consequences have become increasingly visible in inflation, borrowing costs, and the balance sheets of businesses. Now, the Federal Government and the CBN are attempting to close that gap.

On September 18, the Federal Ministry of Finance and the apex bank signed a Memorandum of Understanding on Fiscal-Monetary Policy Coordination, creating a formal mechanism for joint consultation on inflation, government borrowing, debt issuance, liquidity, foreign exchange and economic shocks.

On paper, the idea is straightforward. If the government knows how its borrowing and spending will affect liquidity before acting, and the CBN understands the government’s financing plans before making monetary decisions, both sides may avoid policies that cancel each other out.

But Nigeria’s economic numbers show why the agreement faces a demanding test.

Headline inflation, although moderating, stood at 15.39 per cent in August 2026. Public debt had reached N159.35tn by March. The benchmark interest rate remained at 26.5 per cent in July, while credit to government has expanded considerably faster than credit to businesses.

At the same time, the economy is growing again. Real Gross Domestic Product expanded by 4.43 per cent in the second quarter of 2026, compared with 4.23 per cent a year earlier and 3.89 per cent in the first quarter.

The challenge is therefore no longer simply how to suppress inflation. It is how to do so without suffocating an economy that is beginning to gather momentum.

CBN Governor, Olayemi Cardoso, believes greater coordination could help. “This memorandum provides a structured framework for regular consultation, information exchange and policy coordination,” he said.

According to him, the arrangement will cover government cash management, debt issuance planning, liquidity forecasting, macroeconomic analysis and periodic consultations.

For Cardoso, it transforms decades of informal cooperation into an institutional arrangement.

The International Monetary Fund recently urged Nigeria and other leading African economies to intensify fiscal, monetary and governance reforms to strengthen economic stability and promote broader-based growth.

According to the IMF, fiscal reform remains a major priority for almost all the economies assessed, with Nigeria requiring further improvements in tax policy, revenue collection, public financial management and the efficiency of government spending.

Whether that institutional change eventually translates into cheaper credit, lower inflation and stronger investment will determine if the pact reshapes the economy or merely adds another layer to Nigeria’s economic-management architecture.

Inflation meets fiscal reality

The strongest argument for closer coordination can be found in Nigeria’s inflation history. In August 2023, headline inflation stood at 25.80 per cent, up from 20.52 per cent a year earlier. By August 2024, it had climbed to 32.15 per cent under the old CPI series. It had reached 34.19 per cent in June 2024 before easing to 33.40 per cent in July and 32.15 per cent in August.

NBS subsequently rebased the CPI, changing the price-reference year to 2024 and updating the consumption basket and weights. The rebased series therefore requires caution when making direct comparisons with the old figures.

Under the new series, inflation stood at 23.14 per cent in August 2025 before falling to 15.39 per cent in August 2026. The latest rate was also marginally below July’s 15.43 per cent. Prices were still increasing, however; the pace had merely slowed.

Behind that moderation lies one of the central problems confronting monetary policy.

Food inflation was still 19.57 per cent in August. Many of the factors determining the price of a basket of tomatoes, a bag of rice or the cost of transporting agricultural produce have little connection to the Monetary Policy Rate.

Insecurity, poor rural roads, energy costs, storage deficiencies, exchange-rate movements and multiple transport levies cannot be repaired by an interest-rate decision in Abuja. Yet, the CBN has had to carry much of the burden of fighting inflation.

The benchmark MPR rose rapidly during the tightening cycle, reaching 27.50 per cent by late 2024 and remaining there through much of 2025. The CBN cut it to 27 per cent in September 2025 before another 50-basis-point reduction brought it to 26.5 per cent in February 2026. It remained at that level in July.

The scale of the tightening becomes clearer over a longer horizon. CBN data show that the MPR was around 11.5 per cent in 2020 before beginning a sustained climb from 2022 and eventually moving above 27 per cent.

Research published by the CBN also illustrates the trade-off. A study using Nigerian data from 2006 to 2023 found that contractionary shocks through the MPR and Cash Reserve Ratio reduced output and private-sector credit, while inflation proved more persistent. The researchers argued that supply-side interventions were needed alongside monetary tightening.

That is essentially the problem the new pact seeks to address.

Minister of Finance and Coordinating Minister of the Economy, Taiwo Oyedele, said the government’s objective was to push inflation sustainably into single digits. But he acknowledged that the CBN could not do it alone.

“Our objective is to bring inflation sustainably into single digits and keep it there — and that cannot be monetary policy’s job alone,” Oyedele said. “Fiscal policy must play its part: disciplined, disinflationary spending; sound cash and liquidity management; efficient financing that does not crowd out the private sector.”

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He identified food, imported costs, energy and logistics as structural sources of inflation and proposed stronger grain reserves, improved seeds, irrigation, climate resilience and farm-access roads.

The significance is that Nigeria’s inflation fight could gradually move from an overwhelmingly interest-rate response towards a broader strategy in which fiscal authorities are held responsible for supply bottlenecks that monetary policy cannot fix.

Government takes slice

The second test is borrowing. Nigeria’s public debt has changed dramatically in three years.

Total public debt stood at N97.34tn at the end of 2023, with domestic debt accounting for N59.12tn and external obligations N38.22tn. By March 2026, the total had climbed to N159.35tn. That represents an increase of about N62tn, or roughly 64 per cent, from the end of 2023, although part of the rise in the naira value of external obligations over the period reflects exchange-rate movements rather than fresh borrowing.

More recently, debt rose from N149.39tn in March 2025 to N159.35tn in March 2026, an increase of N9.96tn or 6.67 per cent. Domestic debt alone climbed by 11 per cent from N78.76tn to N87.40tn during the period.

Treasury bills illustrate the increasing reliance on the domestic market. Outstanding Nigerian Treasury Bills jumped from N12.70tn in March 2025 to N16.57tn in March 2026 — a 30.45 per cent increase in one year. FGN bonds stood at another N63.45tn.

The issue is not merely how much Nigeria owes, but what heavy government borrowing does to everybody else seeking money. CBN monetary statistics show that credit to government rose from N23.93tn in April 2025 to N39.60tn in April 2026 — an increase of about N15.67tn or 65.5 per cent.

Private-sector credit moved far more slowly, from about N74.63tn to N80.59tn, an increase of roughly N5.96tn or eight per cent. In effect, government credit expanded by more than two-and-a-half times the absolute increase in private-sector credit over the period.

That divergence captures the “crowding-out” problem the new agreement explicitly mentions.

In a recent comment, renowned economist and Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Muda Yusuf, warned that rising Federal Government borrowing from the domestic financial system is increasingly crowding out the private sector, as banks favour low-risk, high-yield government securities over lending to businesses.

However, the Permanent Secretary of the Federal Ministry of Finance, Raymond Omachi, said the new framework would synchronise government borrowing with money-market liquidity management “to prevent crowding out private sector credit and to optimise interest rates.”

Oyedele framed the problem more simply. “Government borrowing affects liquidity and interest rates. Monetary policy affects the government’s financing costs,” he said.

It creates a circular problem. When inflation forces the CBN to maintain high rates, the government must borrow at higher yields. Higher government yields can then attract more funds away from private borrowers. If government expenditure subsequently injects substantial liquidity back into the system, the CBN may have to sterilise it, keeping monetary conditions tight.

Better coordination could break parts of that loop. But coordination cannot eliminate the underlying arithmetic. If government deficits remain large, they must still be financed. The authorities can improve when and how they borrow, but they cannot coordinate away the financing requirement itself.

Growth in the middle

The difficult part of fighting inflation is that the medicine can also slow the patient. Nigeria’s economy has recently shown stronger momentum. Real GDP growth improved from 3.38 per cent in 2024 to 3.87 per cent in 2025. Growth then accelerated from 3.89 per cent in the first quarter of 2026 to 4.43 per cent in the second quarter.

Within Q2 2026, agriculture grew by 4.39 per cent compared with 2.82 per cent a year earlier, while services expanded by 4.60 per cent against 3.94 per cent in Q2 2025. The figures suggest that economic activity is strengthening just as inflation is moderating. That combination creates an opportunity but also a policy dilemma.

Cut rates too rapidly and inflationary pressure could return. Keep rates restrictive for too long, and businesses may postpone investment, households may borrow less, and growth could lose momentum.

Omachi captured the tension at the signing ceremony, saying the framework should ensure that government spending did not inadvertently intensify inflation while monetary tightening did not “needlessly choke off growth and employment.”

Cardoso sees the arrangement as particularly important because the CBN is moving towards an inflation-targeting framework.

Under such a system, monetary policy becomes more explicitly anchored around achieving a stated inflation objective. But credibility becomes difficult when fiscal policy consistently works in the opposite direction.

At 15.39 per cent in August, inflation would have to fall by at least 5.4 percentage points to move below 10 per cent. But merely reaching single digits will not be enough. Oyedele’s stated goal is to get there “sustainably” and remain there.

That requires a different type of coordination from simply deciding when the government should borrow.

Food supply must improve. Energy and transport costs must become more predictable. Exchange-rate volatility must remain contained. Government expenditure must increasingly expand productive capacity rather than merely demand. At the same time, monetary policy must avoid becoming so restrictive that investment required to solve those supply constraints becomes prohibitively expensive.

That makes implementation more important than the ceremony that produced the agreement.

The CBN Deputy Governor, Corporate Services Directorate, Dr Muhammad Abdullahi, acknowledged as much. “Ultimately, the value of this agreement will be determined by its implementation,” he said.

Its success, he added, would be measured by the quality and timeliness of information exchanged, the discipline of engagement, joint analysis and the ability of both institutions to anticipate and respond coherently to economic risks.

For households, success would ultimately mean slower and more predictable price increases. For businesses, it should translate into more accessible credit and greater certainty over interest rates and exchange-rate conditions. For the government, it could mean better-timed borrowing and more sustainable financing costs.