The benefits of collaboration in any human endeavour cannot be over-emphasised. Every part jointly fitted together produces the whole.
Monetary policy affects financial conditions and the level of bank reserves.
Whereas, fiscal policy can put money directly into or out of people’s pockets. Without fiscal policy as a tool to fight inflation, the federal government is working with one hand tied behind its back.
The fiscal approach is anchored by the Federal Government whose role is mainly to moderate the excesses of other operators in the economy, and provide law and order and enabling operating environments.
The Central Bank acts alone when it hopes that its policies would change the economic dynamics without any input from the fiscal side.
Fiscal policy can slow spending directly by raising taxes or reducing government direct payments without necessarily having the intermediate step of raising the unemployment rate.
Modest upfront fiscal contraction would reduce the cumulative amount of monetary tightening necessary, thereby improving the odds of avoiding recession.
In this regard, analysts opine that the CBN must not operate in isolation, but collaborate with fiscal authorities to achieve sustainable economic results.
Ineffective policies
Most economic policies were not as effective as they ought to be during the last administration due to the lack of collaboration on the part of fiscal and monetary authorities as everyone seems to be running their ‘own thing’ as it were.
While the Finance Ministry appears to be focused only on borrowing from all possible quarters and increasing tariffs to raise more revenue for the government, the CBN was preoccupied with shielding the Naira from unnecessary pressure through rampant importation of items that could have been produced locally, thereby depleting the foreign reserves and spiking exchange rate.
Analysts note that one of the dilemmas of Nigeria is fiscal indiscipline that is seen in the actions of the political office holders. In the last dispensation, while the CBN was trying to grow the economy through expansionary policies targeted at increasing capital flows (or credit) to the real sector, the fiscal authorities, on the other hand, were raising taxes on many items that affect their activities, which the CBN was trying to expand.
And that was why at every opportunity, suspended CBN Governor, Godwin Emefiele always called for an alignment between fiscal and monetary policies.
According to Emefiele, the country’s monetary and fiscal authorities must “collaborate and work in harmony to accelerate Nigeria’s economic development even as he added that “finding a sustainable solution requires a broadened participation of colleagues from the fiscal side.”
Speaking at the 149th meeting of the Monetary Policy Committee of the Central Bank of Nigeria (CBN), the Apex Bank’s Acting Governor, Folashodun Shonubi, said there was a need for fiscal and monetary authorities to align together to be able to address present economic challenges.
Reading the communiqué at the end of the two-day meeting, Shonubi noted that subsidy removal, exchange rate liberalization and disbursement of palliatives, would have pass-through effects on inflation. He therefore, called “monetary and fiscal authorities to sustain collaboration towards addressing the inflationary pressure and incentivize domestic investment to reduce unemployment and boost output growth.
The Monetary Policy Committee “…enjoined the Federal Government to continue to explore policies to improve investor confidence in the Nigerian economy and pave the way for foreign and domestic investments.
“Members emphasized the need to attract investments, particularly, to auto manufacturing, aviation, and rail industries to boost non-oil revenues.”
Experts have continuously argued that all these can only happen when both of them work in harmony. For instance, from time to time, the Federal Government comes up with its fiscal policies based on national economic philosophy and objectives, to aid or readjust the economy.
CBN then makes monetary policies to ensure availability of money at the right cost, adequate volume and appropriate type to facilitate the cost effectiveness of production and trade. However, we saw monetary authority make incursions repeatedly into the economic policy territory hitherto exclusively reserved for the fiscal authority in Nigeria.
This has then made the CBN a punching bag for every frustration in the economy in regards to monetary and fiscal balancing of macroeconomic issues.
Breaking from the past
In trying to break away from the past mistakes, President Bola Tinubu quickly appointed seasoned economist Wale Edun as his Special Adviser on Monetary Policy. The objective was to have the two sides coming together to align policies before they become public document.
And true to type, Nigerians did see it in the MPC decision as the monetary policy rate hike was by 25 basis points contrary to what analysts and industry players had projected.
In arriving at the decision, the MPC considered the outlook for the domestic economy with the policy options to either hold or hike the policy rate to offset the moderate increase in headline inflation.
With headline inflation still on the rise due to the effect of fuel subsidy removal and the naira float which is driving the prices of goods and service upwards, the Apex Bank new that raising rates like in previous times will be counter-productive to what the monetary authorities wanted to achieve with the policy reforms that has been embarked upon by the fiscal authorities.
Knowing that when the palliatives begin to flow, there would be much liquidity in the system, the Committee had to be proactive in line with current thinking.
According to the CBN Governor, “Considering the option to hold, the Committee reviewed the impact of the continued rise in inflation on various macroeconomic variables, noting the potential dampening effect on output growth. Members agreed unanimously that the previous series of rate hikes had indeed greatly moderated the pace of price increases.
“The option to continue to hike the policy rate, albeit moderately, also presented a strong alternative. This is premised on the expected liquidity injections into the economy from the recent policy developments and the likely impact on inflation.
“The Committee remained cautious in arriving at a policy decision as Members noted the need to continue to support investment which will ultimately lead to the recovery of output growth. The balance of these arguments thus leaned in favour of a moderate rate hike, to sustain efforts at anchoring inflation expectation, narrow the negative real interest rate gap, and improve investor confidence.”
Achieving fiscal, monetary balance
For economist Adefolarin Olamilekan, achieving economic growth requires a mixture of monetary and fiscal balance.
According to Adefolarin, there is no universal rule when it comes to raising or lowering the interest rate, so far there is a targeted economic goal.
“On the other hand, events happening in developed countries, where Central banks have been raising rates as measures to reduce inflation, is a case in point.
“Moreover, the latest rate of 18.75% according to the CBN is to also fight inflation in the country.
“Meanwhile, if this could mean alignment with fiscal policy, we can’t but agree with such, having suffered from a peculiar challenge of distorted and disconnected policy in the past that led to fiscal imbalance, huge government debt and poor revenues,” he said.
Going forward, the political economist said the alignment must take cognizance of trade policy to further expand the economic growth, and significantly broaden the non-oil sector and expand export orientation.
“We can’t afford inconsistent policies from the government, especially as successive administration failed to acknowledge the imperative of multi-sectoral advantage the alignment of fiscal and monetary authority could achieved.
“Kind enough, we are indeed may be witnessing a broader and inclusive economic action from the government.
“With economic policy instrument that considered the boosting Nigeria’s economic system, with a focus of linking all real sector together through fiscal and monetary measure.
This, in our understanding, is to remove the disarticulations of previous years impending on our micro and microeconomics stability,” he proffered.
