Monetary policy in Nigeria has long been a subject of scrutiny and debate. As the nation grapples with the dual challenges of achieving price stability and stimulating economic growth, the need for a transparent and credible monetary policy framework has never been more critical. The recent appointments of a new set of governors and deputy governors at the Central Bank of Nigeria (CBN) present an opportunity for introspection and a fresh start in the quest for monetary policy effectiveness.
The central goal of any monetary policy is to strike a delicate balance between price stability and economic growth. In Nigeria, this objective is supplemented by the aspiration to achieve full employment and maintain stable long-term interest rates and real exchange rates. However, the effectiveness of monetary policy in Nigeria has been marred by inconsistencies, leading to a situation where the country neither enjoys low and stable inflation nor desirable economic growth.
A transparent monetary policy is one that is grounded in clear communication of its goals and strategies. The central bank must not only set its objectives but also clearly articulate how it intends to achieve them. Credibility, a cornerstone of any successful monetary policy, is earned when the central bank’s actions align consistently with its stated goals.
Regrettably, the CBN’s credibility has faced significant challenges in recent years due to inconsistent monetary policy decisions. This lack of consistency has eroded the trust of both domestic and international stakeholders, undermining the effectiveness of monetary policy. As a new governor and deputy governor take the helm, it is imperative to address these credibility issues and chart a path towards a more effective and transparent monetary policy framework.
First and foremost, the CBN must reaffirm its commitment to price stability. Price stability is a fundamental goal of monetary policy, as it ensures that the value of the domestic currency remains relatively stable, providing a conducive environment for economic growth. The central bank should communicate its unwavering dedication to this goal, reinforcing its commitment to keeping inflation in check.
To achieve this, the CBN should adopt a more predictable and rule-based approach to monetary policy. Rather than frequent and unpredictable changes in interest rates, the central bank should establish a clear and transparent framework for interest rate decisions. This would reduce uncertainty for businesses and investors, allowing for better planning and investment decisions.
Furthermore, the CBN must address the conflicts among its objectives. While price stability is paramount, it cannot be achieved at the expense of economic growth and employment. The central bank should strive to strike a balance between these objectives, acknowledging that trade-offs may be necessary at times. This approach would help mitigate the adverse impacts of monetary policy on economic growth.
In addition to clarity and consistency, accountability is another vital aspect of a transparent monetary policy. The CBN should enhance its reporting mechanisms and engage in regular and open dialogues with relevant stakeholders, including the government, financial institutions, and the public. Transparency fosters trust and ensures that the central bank’s actions are better understood and accepted by all stakeholders.
The role of the government is also crucial in supporting a credible monetary policy. The government should collaborate with the CBN in setting clear fiscal policies that complement monetary policy objectives. An effective partnership between the fiscal and monetary authorities can help alleviate some of the challenges associated with pursuing multiple objectives.
Lastly, the independence of the central bank should be preserved and respected. A central bank free from political pressures is better equipped to make decisions in the best interest of the economy. The recent appointments of the Governor and Deputy Governors by President Tinubu and their subsequent confirmation by the Nigerian Senate should be viewed as an opportunity to uphold this independence and strengthen the central bank’s capacity to pursue its objectives.
An economist and Policy Analyst writes from
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