CBN's funding of govt deficit will make inflation worse - IMF

The International Monetary Fund (IMF) has warned that the Central Bank of Nigeria’s continued financing of the country’s deficit through ways and means will complicate the effort to contain inflation.

The CBN has faced criticisms over its monetary policies and the massive injection of cash into the economy. The bank’s advances to the government has moved from less than N800 billion in 2015 to N20 trillion, far more than allowed limits.

The finance minister, Zainab Ahmed, in October said the federal government will convert the loan into a bond repaid in 40 years. The government has continued to draw from the CBN after that announcement.

According to data released by the National Bureau of Statistics, Nigeria’s inflation rate accelerated to 21.09 percent in October 2022 from 20.8 percent it recorded in the previous month.

Speaking at an interactive panel at the Nigerian Economic Summit on Tuesday, the IMF’s Resident Representative for Nigeria, Ari Aisen, said to strengthen the CBN monetary policy framework, the fiscal deficit limit should be respected.

“Fiscal deficits have been very large and the statutory limits by the CBN Act of 5 percent of prospective inputs of maximum financing should be respected,” he said.

“Again, the monetization of the deficit or financing the deficit through money creation will be inflationary. We all know about the ways and means they accumulated over several years now.

“Hopefully, there is a solution for the past but going forward, that modus operandi, whereby the central bank is financing deficits is going to complicate things in terms of inflation fighting.”

Mr Aisen said the IMF feels it will be difficult for the central bank to achieve the goals of monetary policy, namely, growth, employment, price stability because multiple objectives have required multiple instruments that will not necessarily be available.

“So in many countries, what countries do and I think Nigeria will not be the exception is to classify or to target, if you wish, the main objective of monetary policy to be stable and low inflation simply because this is already a very challenging objective in itself,” he said.

“As well described, there are many shocks, shocks of global nature, for example, the increase in prices of wheat fertilizers given the war in Ukraine.

“Domestic shocks, we just had unfortunate tragic floods in the country that may have an impact on food prices domestically as well. So it’s already very difficult for a central bank when facing such type of shots to control inflation.”