The World Bank Group has emphasized the importance of the Central Bank of Nigeria (CBN) maintaining its course in addressing the persistent challenge of inflation. This call to action comes amidst the CBN’s aggressive monetary tightening policy, which saw the benchmark interest rate rise by a substantial 875 basis points in 2024. The World Bank stresses that while supply-side factors contribute to inflationary pressures, the CBN’s focus on controlling inflation remains crucial. They suggest exploring avenues to enhance agricultural yields, improve connectivity between rural and urban areas, and strategically adjust trade policies, particularly tariffs, to stimulate local production. Addressing these structural issues is seen as a long-term solution to alleviate inflationary pressures.
Furthermore, the World Bank highlights the significant economic drag caused by fuel and foreign exchange (FX) subsidies, estimating their combined cost at 5% of Nigeria’s GDP. These subsidies are viewed as unsustainable and represent a significant financial burden on the government. The World Bank likens the necessary reforms to a difficult medical treatment, emphasizing the need for decisive action despite potential short-term pain. They acknowledge the progress made in reducing Nigeria’s debt service-to-revenue ratio from 100% to approximately 50%, but caution that the cost of reforms, particularly the impact of high food inflation exacerbated by FX rates and fuel prices, disproportionately affects the most vulnerable segments of the population. Consequently, the World Bank urges the Nigerian government to not only continue but also accelerate social protection programs, particularly through targeted and digitally delivered cash transfers, to mitigate the impact on the most vulnerable.
The International Monetary Fund (IMF) echoes the World Bank’s concerns regarding inflation, emphasizing the need for enhanced coordination between fiscal and monetary authorities. The IMF commends the joint commitment by the CBN and the fiscal authorities to strengthen coordination and avoid further accumulation of Ways and Means advances, a form of central bank financing to the government. This coordinated approach, according to the IMF, is crucial for tightening financial conditions and reducing money supply, ultimately contributing to lower inflation. The IMF also underscores the importance of fiscal policy in addressing the distributive consequences of critical reforms, such as the naira reforms and fuel subsidy removal, as these reforms often disproportionately impact vulnerable populations. The IMF suggests leveraging the faster transmission lag of fiscal policies, compared to monetary policies, to implement social protection measures that mitigate the impact on these vulnerable groups.
A key area of focus for both the World Bank and the IMF is the strengthening of social protection programs. The IMF particularly advocates for a “human face” approach to fiscal consolidation, highlighting the importance of cash transfer programs as a vital safety net for those most affected by economic reforms. These programs, designed to provide direct financial assistance to vulnerable households, are crucial in mitigating the social and economic consequences of policy changes. The emphasis on digital delivery mechanisms aims to enhance transparency and efficiency, ensuring that funds reach the intended recipients while minimizing the risk of misuse.
The issue of Ways and Means advances, a form of government borrowing from the central bank, is also addressed. The IMF criticizes the historical reliance on this practice in Nigeria, labeling it as deficit monetization with detrimental effects on inflation and financial conditions. The decision to discontinue this practice is lauded, and the subsequent securitization of these advances is viewed positively, as it spreads out the maturities and promotes transparency. The IMF emphasizes the importance of central bank independence and fiscal prudence to prevent future recurrence of this issue and its associated negative macroeconomic consequences, including pressure on the parallel exchange rate and inflation.
In conclusion, both the World Bank and the IMF advocate for a multifaceted approach to tackling Nigeria’s economic challenges, particularly inflation. This approach includes maintaining a tight monetary policy stance, implementing structural reforms to address supply-side constraints, strengthening fiscal and monetary policy coordination, and prioritizing social protection programs to mitigate the impact of reforms on vulnerable populations. The phasing out of Ways and Means advances and their securitization is seen as a positive step towards enhancing fiscal responsibility and macroeconomic stability. The emphasis throughout is on the need for sustained and decisive action, coupled with a focus on protecting the most vulnerable, to ensure sustainable and inclusive economic growth.
