The ongoing financing of the federal government’s deficits through multiple avenues, according to Kingsley Moghalu, a former deputy governor of the Central Bank of Nigeria (CBN), causes inflation.
On Thursday, Moghalu spoke during an interview with Arise TV.
MDB reported in 2018 that the federal government borrowed N6.3 trillion through ways and means advances from the CBN in the first 10 months of 2022.
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The CBN loan amount of N22.7 trillion was approved by the senate earlier in May 2023 and used by the executive branch of government.
The CBN uses a lending facility called “ways and means” to cover the government’s budget gap.
The CBN act was revised by the senate in May 2023, raising the federal government’s borrowing limit for ways and means from 5 to 15 percent.
Speaking about the country’s rising inflation rates despite the apex bank’s interventions, Moghalu claimed that the inflationary impact “is the biggest and immediate threat” at a time when the petroleum subsidy and naira float have been eliminated.
“So, inflation in Nigeria is going to just continue to shoot up in the immediate time, that is a fact,” he said.
“This becomes a challenge because in order to attract capital, when you have a very stiff rise in inflation, most times you need to keep interest rates high for a while, but Nigeria’s economy is very funny, it doesn’t always follow the textbooks.”
Moghalu said there are many reasons for the continuous surge despite raising interest rates.
According to the economist, what is causing this current round of inflation is “not the standard definition of inflation of too much money chasing too few goods only, there is also a cost-push factor”.
“Also, the central bank itself was contributing to inflation through the monetary phenomenon of illegal financing of the federal government’s massive deficits to the tune of N23 trillion, in ways and means lending,” Moghalu said.
“Of course, you’re contributing to inflation with one hand you say you’re fighting inflation with the other hand. Why was the ways and means lending so high? It is because you have a government that could not manage its fiscal books and there you have the fiscal period of the price ladder being also relevant in addition to the quantity theory of money and how they play out in the market that causes inflation.”
To effectively manage inflation, Moghalu said the CBN needs to be independent and free from the control of the government.
“If the federal government is far more responsible, and disciplined with the budget and with spending, it will help the central bank to manage inflation, but then the federal government is just spending or borrowing like a drunken sailor, and then the central bank alone has to manage the inflationary consequences. It becomes very difficult,” the economist said.
