The Central Bank of Nigeria has continued to print money to finance the federal government’s budget deficit, a development that may undermine its ability to tame inflation, the Economist Intelligence Unit (EIU) has said.
The EIU noted that the CBN tightened monetary policy with a 150-basis-point hike in the policy rate in May 2022 as inflation stayed on an upward trajectory.
It said: “Expectations of inflation in Nigeria are understandably high after years of annual price growth above the central bank’s 9 percent target ceiling.
“The ability of the CBN to tame inflation through raising rates may be undermined by its continued direct financing of the budget deficit.”
The EIU said building credibility in the target rate had not been a priority in recent years. “The continued printing of money at the same time as tightening policy would prevent effective control of the price level, and is highly likely,” it added.
It said CBN’s May policy rate hike followed the onset of a global tightening cycle prompted by the inflationary fallout from the Russia-Ukraine war and the COVID-19 pandemic.
According to the EIU, advanced markets are bringing or have brought quantitative easing programmes to a close ahead of interest-rate rises to tackle second-round pass-through effects.
“By contrast, the CBN has continued to print money for the federal government, whose overdraft facility with the CBN reached N19 trillion ($46 billion) in April 2022, up from N17.4 trillion at end-2021. The CBN is also operating a range of direct lending schemes for the agricultural, manufacturing and energy sectors, currently totalling about N3.6 trillion ($9bn),” it said.
The EIU said as crude oil production had been underwhelming, the public finances had not benefitted much from crude prices of more than $100/barrel for most of 2022.
It said: “At the same time, the authorities are maintaining an immensely expensive petrol subsidy and the fiscal deficit is going to be large by Nigerian standards in 2022.
“All prudential rules on the government borrowing through the overdraft facility have long been broken, but fiscal responsibility laws to prevent the Treasury from market borrowing in excess of the budget are taken more seriously. The CBN has repeatedly stepped in directly as a lender.”
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According to the EIU, it seems highly plausible that the CBN will continue financing a widening budget deficit through the overdraft facility.
It said: “The cost of the subsidies for 2022 keeps mounting as petrol prices move higher internationally, with the annual projection having already risen from N3 trillion at the start of 2022 (a forecast from the national oil company that even the finance minister thought curiously high at the time) to over N4 trillion as announced by the president in early April.
“World crude prices have climbed another 20 percent higher since then. The subsidy bill comes directly out of government revenue so money printed by the CBN would mostly be for other government purchases.
“If the overdraft gets larger, it would be a clear sign that the CBN is politically unable or unwilling to take a clear stance on inflation and the anchoring of expectations.”
The EIU noted that Nigeria’s inflation hit 17.7 percent in May in line with its full-year forecast for 2022, saying insecurity in most of northern Nigeria continued to weigh on supply chains.
The Russia-Ukraine war and a lingering but ebbing COVID‑19 pandemic are external interruptions, it said.
“The EIU does not expect inflation to return to the 9 percent inflation target ceiling in 2022‑26, partly because of policy inconsistencies,” it said. “Our current projection for average inflation in 2023 is 13.4 percent but price growth could run higher depending on how far the CBN deviates from its stated policy of monetary tightening.”
