Aligning monetary, fiscal policies for robust financial system

Monetary and fiscal policies are considered crucial for establishing a robust financial system; hence the need to align them, especially in Nigeria.

Experts believe that when these two major macroeconomic levers work in harmony, they create a stable, predictable economic environment that allows financial institutions to perform their core function of intermediation effectively, while minimising systemic risk.

To this end, the Central Bank of Nigeria (CBN) recently invited stakeholders to map out ways to effectively align both policies in its recent seminar for finance correspondents and business editors.

Monetary Policy, managed by the CBN, uses tools like interest rate changes and open market operations to control money supply and maintain price stability.

By adjusting interest rates, the CBN can influence borrowing, spending and investment decisions, impacting overall economic growth and inflation levels.

Fiscal policy, on the other hand, refers to the use of government spending and tax policies to influence economic activity.

Managed by the government, fiscal policy focuses on increasing public spending, reducing taxes or a combination of both to stimulate the economy during a downturn.

Fiscal policy may also involve reducing spending or increasing taxes to cool down an overheating economy.

While fiscal policy primarily targets aggregate demand through changes in taxation and government spending, monetary policy influences money supply, borrowing costs, and credit availability.

Experts say these two policies, working in tandem, can help achieve macroeconomic stability and avoid situations like hyperinflation or recession.

They say coordination between fiscal and monetary policy becomes crucial when aiming for overall economic stability.

It is their contention that without coordination, fiscal expansion by the Federal Government could lead to excessive inflation if not accompanied by monetary tightening.

The experts also say that restrictive fiscal policies might need to be offset by accommodative monetary measures to ensure that growth is not compromised.

They posit that the primary benefit of the alignment is that it prevents conflicting signals and policy pushback, which can introduce volatility and uncertainty into financial markets.

A renowned Economist, Prof. Ken Ife, described a robust financial system as one that is resilient to domestic and external shocks.

Ife, the Chief Economic Strategist, ECOWAS Commission, said that such a system should be able to efficiently intermediate resources, protect consumer deposits, maintain market integrity and provide the necessary capital for economic growth.

“This involves managing and eliminating systemic risks created by the historical tension between the CBN and the Ministry of Finance.”

He said that the major threat to the stability of the Nigerian financial system and fiscal stability was fiscal dominance.

According to him, fiscal dominance occurs when the fiscal authority’s large, chronic borrowing needs (budget deficits) constrain the independence and effectiveness of monetary policy.

“The CBN is always compelled to finance government deficits via Ways and Means Advances.

“This injects massive, non-sterilised liquidity into the economy, directly leading to high inflation and making the CBN the primary cause of instability it is mandated to control.”

Ife said that the role of the CBN was to ensure price stability and oversee the soundness of the financial system.

He said that its tools must be used consistently and predictably to inspire and maintain investor confidence in the financial system.

The economist urged the apex bank to prioritise its legal mandate of price stability.

“Achieving sustained disinflation is the most critical contribution to financial system health, as high inflation distorts pricing, creates negative real interest rate, discourages savings and undermines long-term investments.

“Monetary policy decisions must be made solely based on economic data, free from political pressure of short-term fiscal needs,” he said.

The CBN Governor, Mr Olayemi Cardoso, said that it had become clear to the monetary and fiscal authorities that the most efficient and effective way to achieve their objectives is through partnership and collaboration.

While presenting a communiqué from the 303rd meeting of the apex bank’s Monetary Policy Committee, Cardoso said that the collaboration had become obvious to the rating agencies.

“You will see collaboration in operation in many spheres, including the outcomes of the rating agencies.

“We are very fortunate that we have a position of the Permanent Secretary of the Ministry of Finance as a standing member of the MPC.

“That also is something that we do not take lightly, given that it is the leadership of the fiscal authority that sits here.

“Also, further down the line, across different parts of both the CBN and the Federal Ministry of Finance in particular, we have joint committees that meet regularly and work together.”

Cardoso said that the move to inflation targeting by thc CBN required the utmost collaboration between the fiscal and the monetary authorities.

“In fact, some would argue that you are not likely to succeed if you are unable to collaborate effectively.

“We are well on that path, and we will do all that is in our power to ensure that the collaboration continues.

“It is that collaboration that has brought stability, and we all know what it means to have economic stability; we are not about to lose that for any reason in the world,” he said.

CBN’s Deputy Governor, Corporate Services, Emem Usoro, said that aligning fiscal and monetary decisions would promote transparency, accountability, policy discipline and credibility, particularly as digital finance expanded.

Usoro said that ongoing reforms within the apex bank had restored relative stability and improved key economic indicators.

She, however, said that consistent public communication was vital to deepening understanding of policy choices and sustaining confidence.

“While progress has been made, more work is required to improve macroeconomic fundamentals and the standard of living for Nigerians.

“This makes partnerships among policymakers, regulators, and the media even more important.”

She cited high inflation, currency volatility, limited external reserves and heavy dependence on Ways and Means financing as key challenges of the financial system in the recent past.

According to her, guided by strong and transparent leadership, the CBN implemented well-sequenced and compliance-driven measures, including orthodox monetary policies, strengthened corporate governance, and ongoing bank recapitalisation.

“These actions, aligned with the Federal Government’s reform agenda, have helped restore stability and improve key macroeconomic indicators,” she said.

Usoro said that notable achievements included a decline in inflation to 16.05 per cent, stabilisation of the Naira at below N1,500 to the dollar, and external reserves exceeding 46 billion dollars, representing over 10 months of import cover.

She said that monetary policy adjustments were also supporting lower lending rates as inflation continues to ease.

Dr Afangideh Johnson, Assistant Director, Monetary Policy Department at the CBN, said that Nigeria’s macroeconomic landscape required coordinated responses to address structural weaknesses.

Johnson said that aligning government borrowing with CBN liquidity forecasts would enhance monetary policy transmission and prevent crowding out private-sector lending.

He recommended formalising the Fiscal-Monetary Policy Coordination Committee and establishing a multi-agency council to harmonise fintech, digital payment and data-protection regulations.

Most of the stakeholders agreed that alignment of monetary and fiscal policies required certain mechanisms for effective coordination.

They urged policymakers to establish clear frameworks and operational arrangements, adding that the CBN must maintain its independence and strictly adhere to its primary mandate of price stability.

What’s more, the stakeholders also submitted that monetary policy decisions, like setting the policy rate, should be guided strictly by economic data, free from short-term political pressure related to fiscal needs.

Kadiri Abdulrahman writes from News Agency of Nigeria

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