READING THE TEA LEAVES By Obinna Chima [email protected] 08152447875 (SmS only)

The 300th meeting of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has been scheduled to hold, between Monday and Tuesday, in Abuja. This will be the second MPC meeting for the year and the eighth since the Olayemi Cardoso-led CBN was constituted.

The MPC is the highest policy making committee of the CBN with the mandate of reviewing economic and financial conditions in the economy; determining appropriate stance of policy in the short to medium term; reviewing regularly, the CBN’s monetary policy framework and adopt changes when necessary, as well as communicate monetary/financial policy decisions effectively to the public and ensure the credibility of the model of transmission mechanism of monetary policy.

As expected, economics and financial market analysts have already begun projecting outcomes and policy shifts ahead of the meeting. From speculations on interest rate adjustments to forecasts on liquidity management, this flurry of commentary has become a familiar ritual in the lead-up to each meeting. While such anticipatory analysis reflects the importance of the MPC’s decisions to the financial markets and broader economy, it is crucial to understand that the committee’s deliberations are far more comprehensive than surface-level predictions often suggest. Likewise, the belief by some Nigerians that monetary policy alone can cure all that ails the economy is a misconception that warrants a closer look. Let us be clear: monetary policy is important. But it is not omnipotent, and treating it as such not only misrepresents its role but also distracts policymakers, especially from the other arm of the federal government, and from the urgent structural reforms the country desperately needs.

So far, the Cardoso-led CBN has clung onto orthodox monetary policy and has deployed a full suite of conventional tools — raising the Monetary Policy Rate, adjusting cash reserve ratios, and tinkering with the foreign exchange framework. 

The MPC does not make decisions in isolation, in response to emotions or market sentiments. Its framework and decisions are rooted in careful assessment of both global and domestic developments.

Globally, factors such as the ongoing conversation around reciprocal tariffs, which appears to be simmering down, interest rate directions in advanced economies, commodity price trends—especially crude oil and geopolitical risks are thoroughly examined for their transmission effects on Nigeria’s macroeconomic stability.

In the domestic economy, the committee will evaluate a complex matrix of inflation data, exchange rate pressures, credit growth, fiscal dynamics, and output trends before concluding.

For instance, Thursday’s announcement by the National Bureau of Statistics that Nigeria’s headline inflation rate slightly dropped to 23.71 percent in April 2025, down from 24.23 percent in March, will be one of the major considerations at the meeting. According to the bureau, the movement in April 2025 headline inflation rate showed a decrease of 0.52 percent compared to the March 2025 headline inflation rate.

This broader analytical lens ensures that monetary policy responses are not reactive but strategic, anchored in both short-term realities and long-term objectives.

 While analysts may zero in on a single variable, such as headline inflation or the exchange rate, the MPC’s mandate requires balancing multiple and sometimes conflicting goals: price stability, economic growth, and financial system soundness. Understanding this context helps temper expectations and underscores the importance of patience, coordination, and structural alignment in achieving real macroeconomic stability.

The uncomfortable truth is that Nigeria’s inflation is largely cost-push, not demand-pull. This means it is driven by factors outside the control of interest rate policy: insecurity in food-producing regions that intensified recently and has seen many farmers abandon their farmlands, poor transportation networks, heavy import dependency, energy price volatility, and rising cost of living. Raising interest rates in this context is like using a thermostat to fix a broken engine.

What we face as a nation is a structural economic disorder. No amount of fine-tuning of monetary policy alone can mask the fact that our factories run on diesel generators, our farmers face armed conflict rather than market competition, our imports outstrip local production and the rising cost of living, which is suffocating the common man.

Behind every overburdened central bank lies an underperforming fiscal authority. Nigeria’s fiscal space remains narrow, constrained not only by low revenues but also by misaligned priorities.  This imbalance makes it impossible to stimulate long-term growth. Without productive capital spending, we are simply recycling poverty through borrowed consumption. Already, the World Bank has described the key assumptions of 2.1 million barrels per day oil production and $75 per barrel price in the country’s 2025 budget as overambitious, given the current production level of 1.6mbpd and about $65pb price in the international market. The multilateral institution has also pointed out that the pace of growth in Nigeria needs to be accelerated further to meet its $1 trillion economy aspiration by 2030, deliver poverty reduction and shared prosperity. All these require hard work from the fiscal authorities, with policy support from the monetary side of the economy.

In most developed economies, fiscal policy sets the tone for economic direction, with monetary policy providing supportive alignment. But unfortunately, in Nigeria, the reverse is the norm. Monetary policy often takes the lead, while fiscal policy lags in coherence, responsiveness, and execution.

This imbalance mirrors the central argument in Mohamed El-Erian’s book, ”The Only Game in Town”, where he describes how central banks are forced to operate beyond their traditional mandates in the absence of decisive fiscal leadership. According to El-Erian, since the 2008 global financial crisis, global central banks ventured, not by choice, but by necessity, ever deeper into the unfamiliar and tricky terrain of unconventional monetary policies and heavily intervened in the functioning of markets. He also revealed in the book that during the 2008 financial crisis, in the US, a myriad of emergency funding windows were opened to enable cash to be injected into the financial system, and from virtually all directions. We saw this in Nigeria, with past CBN Governors venturing into development finance, agriculture funding, and interventionist credit schemes —areas that rightly belong to fiscal authorities. It not only blurs institutional roles but also weakens the accountability and efficiency of policy outcomes. A monetary authority overstretched into fiscal space becomes vulnerable to politicisation and operational fatigue,

This, however, is one of the areas we must commend Cardoso for, as he has maintained his stance on orthodox monetary policy, which clearly has increased transparency in the apex bank’s operation. This was evident in its consolidated and separate financial statements for the year ended December 2024, which also revealed that the CBN Group’s year-on-year losses declined to N680.62 billion in the year under review compared to N1.16 trillion in 2023. The CBN also recorded significant growth in its operating income in 2024, as it climbed to N15.23 trillion in 2024, from N5.89 trillion in the preceding year.

Likewise, the banking sector posted significant growth in its total operating income for its subsidiaries, as it rose by 41.3 per cent to N15.1 trillion in 2024, from N5.91 trillion in 2023.  Also, the group posted a profit after tax (PAT) of N38.8 billion, indicating a recovery from N1.15 trillion loss in 2023.

This is commendable as confidence is earned by transparency, not defended by rhetoric. Investors, both local and foreign, require predictability and fairness, a path Cardoso has chosen to follow.

From the foregoing, there is a need to strengthen fiscal policy activities in Nigeria to promote sustainable economic growth, address challenges like debt, and improve the country’s fiscal standing. A proactive fiscal policy can help stabilise growth, create a more predictable business climate, and facilitate increased investment in infrastructure and social services.

Just as importantly, Nigeria’s trade policy must be realigned to support macroeconomic goals. The country needs a trade strategy that is coherent, predictable, growth-oriented and aligns with the complexities in the global trade environment. Policymakers must target policies and programmes that encourage local production, reduce structural import dependence, and enhance the country’s competitiveness in both the regional and global markets.

Ultimately, we must demystify the role of monetary policy. It is not a magic wand. Monetary policy will always have a role, but it cannot drive a car with no engine. Until Nigeria confronts its structural and institutional weaknesses, the central bank’s best efforts will amount to managing decline rather than engineering growth.