Monetary policy under Cardoso: Inflation, exchange rate, and black market

Introduction

Since assuming office in September 2023, Governor Olayemi Cardoso has implemented several bold monetary policy reforms aimed at stabilising the Nigerian economy. His tenure has focused on tackling inflation, managing exchange rate volatility, and restoring confidence in Nigeria’s foreign exchange (FX) market. However, despite these efforts, fundamental structural challenges—including excessive government spending, the influence of currency traders in the parallel market, and persistent fiscal-monetary misalignment—continue to undermine monetary policy effectiveness.

This article examines the impact of the Cardoso-led CBN’s monetary policy, the persistent challenges posed by unregulated currency trading, and the implications of the impending rebasing of Nigeria’s Consumer Price Index (CPI) for policy formulation.

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Monetary policy initiatives and their impact

1. Inflation management and interest rate adjustments

To curb rising inflation, the CBN under Cardoso’s leadership adopted an aggressive monetary tightening stance, raising the Monetary Policy Rate (MPR) by a cumulative 875 basis points to 27.5 percent in 2024. This was aimed at reducing excess liquidity in the system and slowing down inflationary pressures.

Despite these efforts, inflation remains elevated, reaching 34.8 percent in December 2024, up from 34.6 percent in November, reflecting the deep-rooted cost-push pressures in the economy. Key drivers include rising fuel prices, exchange rate pass-through effects, and supply chain disruptions. The CBN expects a gradual decline in inflation in 2025 as monetary tightening gains traction, but this will only be realised if fiscal discipline and structural reforms complement monetary measures.

2. Exchange rate management and foreign exchange market reforms

Governor Cardoso has taken significant steps to reform Nigeria’s foreign exchange market. The unification of multiple exchange rate windows was a major policy shift designed to eliminate arbitrage opportunities and restore investor confidence. This reform led to a 79.4 percent increase in remittances through International Money Transfer Operators, reaching $4.18 billion in the first three quarters of 2024.

Additionally, the CBN has been working to clear Nigeria’s $7 billion FX backlog, with at least $2 billion already settled. These efforts have contributed to an increase in external reserves, which exceeded $40 billion—the highest level in nearly three years. However, despite these interventions, the naira remains volatile, fluctuating under speculative pressures largely driven by the activities of currency traders in the parallel market.

The parallel market: A key driver of exchange rate instability

A major weakness in Nigeria’s FX policy remains the unregulated and unchecked operations of currency traders, whose speculative activities fuel exchange rate devaluation. No economy in the world allows its local currency to be freely traded in the black market at the massive volumes seen in Nigeria. Even more alarming is the fact that Nigeria is the only country where the Central Bank itself has historically supplied foreign exchange to the black market, thereby legitimising an inherently corrupt and destructive system.

Each time the Federation Account Allocation Committee (FAAC) disburses funds to federal, state, and local governments, and whenever government contractors receive payments, excess naira liquidity floods the system. This liquidity then chases dollars in the parallel market, causing immediate depreciation of the naira. The artificial demand created by currency traders not only fuels corruption but also makes it impossible for the exchange rate to stabilise under market-driven forces.

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Unless decisive action is taken, Nigeria’s exchange rate problem will persist. The government must:

1. Criminalise parallel market currency trading: Black-market currency trading should be classified as economic sabotage, with strict enforcement measures against operators.

2. Cease CBN’s indirect supply of FX to parallel markets: The CBN must stop all direct or indirect FX sales that find their way into the black market, ensuring FX transactions occur only through regulated channels.

3. Enhance FX market transparency: The government should improve oversight and supervision of FX transactions to ensure that only genuine trade and investment-related demands drive forex allocations.

4. Implement stronger capital controls: Nigeria must adopt strict policies on capital flight and illicit FX transactions, ensuring compliance with formal financial regulations.

5. Increase local dollar liquidity: A sustainable strategy to stabilise the naira is to boost non-oil exports, enhance foreign direct investment (FDI), and encourage official remittances through banking channels rather than informal sources.

Challenges posed by excessive government spending

Another critical challenge undermining monetary policy effectiveness is the lack of fiscal discipline. Despite CBN’s tightening efforts, the Nigerian government continues to engage in excessive spending, which injects excess liquidity into the system and fuels inflation.

Recently, Monetary Policy Committee (MPC) member Murtala Sabo Sagagi pointed out that unchecked government expenditure directly counteracts the impact of higher interest rates, making it harder for the CBN to control inflation. As long as fiscal spending remains unchecked, monetary policy alone cannot stabilise the economy.

To ensure long-term stability, Nigeria must:

• Strengthen fiscal responsibility laws to prevent excessive borrowing and deficit spending.

• Implement expenditure caps on recurrent spending while prioritising capital investment.

• Enhance revenue mobilisation through tax reforms, non-oil sector growth, and improved efficiency in revenue collection.

Implications of the CPI Rebasing for Monetary Policy

The upcoming rebasing of Nigeria’s Consumer Price Index (CPI) by the National Bureau of Statistics (NBS) will provide a more accurate measure of inflation. The new methodology will:

• Update the weight reference period to 2023 and the price reference period to 2024.

• Expand the CPI basket from 740 to 960 items, incorporating emerging sectors such as the digital economy and e-commerce.

While this rebasing will not directly change inflation trends, it will enhance the precision of policy decisions by providing better insights into price movements across different sectors. For the CBN, this means improved targeting of inflationary pressures and better calibration of interest rate policies.

Read also: Naira appreciates further after CBN’s new BDC directives

Conclusion and policy recommendations

Governor Cardoso’s monetary policies have demonstrated a clear commitment to tackling inflation and exchange rate volatility through orthodox monetary tools and market transparency initiatives. However, key structural challenges—particularly the unchecked influence of parallel market currency traders, excessive government spending, and fiscal-monetary misalignment—continue to undermine policy effectiveness.

To restore macroeconomic stability, Nigeria must:

1. Declare currency traders as economic saboteurs: Black-market FX traders must be treated as criminals and prosecuted accordingly.

2. Eliminate CBN’s FX supply to the parallel market: The CBN must stop all direct or indirect sales of foreign exchange that fuel speculation.

3. Enhance fiscal discipline: Government spending must align with monetary policy objectives to prevent inflationary pressures.

4. Strengthen FX market regulations: Only legitimate businesses and investors should have access to foreign exchange at official rates.

5. Expand non-oil dollar inflows: The government must aggressively promote non-oil exports, attract FDI, and channel remittances through formal banking systems.

The rebased CPI will provide more accurate economic indicators, allowing for more effective policy decisions. However, without firm action against currency speculation and fiscal indiscipline, Nigeria will continue to grapple with inflation and exchange rate instability.

It is time for a decisive policy shift—one that prioritises economic integrity over short-term gains.

This article builds upon my previous work on the rebasing of Nigeria’s CPI and its implications for economic policy.