Harmonization of Fiscal and Monetary Policies in Nigeria

Abstract

To discuss how Nigeria can attain desired macroeconomic outcomes through harmonization of fiscal and monetary policies in Nigeria, we will review the main facts about our attainment of desired economic outcomes over the last decade and assess the deployment of fiscal and monetary policy instruments over the period. The realities of the last decade have been such that all target variables deteriorated, as output growth decelerated steadily until the economy slid into a recession, and liquidity contracted relative to GDP, the Naira lost two-thirds of its value against the US dollar, precipitating a high cost-pushed inflation, which is however well-known to be transitory and self-reversing in nature. We address the grim realities of a decade of growth deceleration and liquidity contraction that culminated in recession, devaluation, and cost-pushed inflation. Issues responsible for the grim realities are teased out and explored, and various options for addressing the issues are identified. Growth decelerations and declining liquidity should have called for looser policies to boost growth and liquidity. Surprisingly, all policy variables were tightened too. By 2016, government spending as a percentage of GDP had contracted very steeply to less than half of its 2008 level, and, since 2010, monetary policy rate has more than doubled, and cash reserve requirements has risen twenty-fold! The decade-long growth deceleration and decline in liquidity were thus precipitated by steep fiscal contractions throughout the decade and a switch to an ultra-tight monetary policy stance since 2010. The recession, devaluation and inflation resulted from negative oil price shocks from mid-2014. In other words, growth deceleration and decline in liquidity were inflicted by decade-long fiscal and monetary policy illusions and myopia, while recession, devaluation and inflation resulted from fiscal and monetary policy inertia in the face of negative external shocks since mid-2014. We make the case for expressing fiscal and monetary quantities as percentages of GDP to overcome illusions, adopting a forward-looking approach to the deployment of fiscal and monetary policy instruments to overcome myopia, and creating institutions to ensure that policy threats are routinely recognized and required actions are routinely taken, to overcome inertia. Since key fiscal and monetary policy instruments have become poorly aligned with key growth and liquidity targets, we suggest ways of realigning the instruments with the targets. We also suggest institutional reforms that will make Nigeria better able to identify and respond proactively to policy threats, and achieve greater harmony in the visions, words, and actions of policy agencies.