New Fiscal-Monetary Covenant and Inflation Expectation

James Emejo writes that the country’s inflation battle is entering a new phase as the Central Bank of Nigeria moves beyond the traditional tools of interest rates and liquidity management to demand stronger fiscal discipline as the other pillar of price stability

For years, Nigeria’s fiscal and monetary authorities have operated in the same economic space but have not always pulled with the same force. Government borrowing could inject liquidity that monetary policy subsequently had to restrain.

Fiscal financing pressures could complicate the CBN’s effort to contain inflation, while high interest rates adopted to restore price stability could simultaneously increase the government’s cost of borrowing.

It is this longstanding tension that gives the September 18 Memorandum of Understanding (MoU) between the Central Bank of Nigeria and the Federal Ministry of Finance a significance beyond the signing ceremony.

At face value, the agreement is about consultation, information-sharing, forecasting, government cash management and debt issuance.

But beneath the bureaucratic language is a bigger proposition: Nigeria’s two principal macroeconomic policy engines should no longer be allowed to work at cross-purposes.

And Cardoso, speaking after the latest Monetary Policy Committee (MPC) meeting, made perhaps the clearest case for why the agreement matters.

“There’s nothing new about this,” the CBN governor stressed, pushing back against any interpretation that the MoU represented the beginning of cooperation between the two institutions. His point was important.

Fiscal and monetary authorities had always interacted. The CBN board already includes the Minister of Finance, the Permanent Secretary of the ministry and the Accountant-General of the Federation, while the ministry’s Permanent Secretary sits on the MPC. Various committees and institutional channels have also historically provided opportunities for coordination.

What has changed, Cardoso observed, was that the relationship is being moved from personalities and informal engagement into a formal architecture.

“That is the difference here,” he said in substance, explaining that the institutions had decided to institutionalise their collaboration because “individuals come, individuals go.”

That observation may ultimately prove to be the most consequential element of the agreement.

From personalities to process

The country’s history provides ample evidence of the danger of relying on personal relationships to coordinate macroeconomic policy.

The problem was not necessarily that officials refused to talk to one another. It was that the architecture for ensuring that fiscal decisions, debt operations, liquidity management and monetary policy moved around a common set of assumptions was not sufficiently robust.

The legacy was particularly visible in the CBN’s financing of government deficits.

Ways and Means advances to the federal government accumulated to about N22.7 trillion before their securitisation, according to the CBN. Cardoso subsequently identified the cessation of deficit financing through Ways and Means as one of the major changes under his administration.

The IMF had also warned about fiscal dominance and the consequences of excessive reliance on central-bank financing. Its 2024 assessment noted that Nigeria had again relied on monetary financing in the first half of 2023 and stressed that successful inflation targeting required, among other conditions, the absence of fiscal dominance.

The IMF’s earlier assessment had been even more direct, describing monetary conditions as still accommodative and characterised by fiscal dominance, while recommending reduced reliance on CBN overdrafts.

This was the difficult environment into which Cardoso stepped.

The CBN subsequently tightened monetary conditions aggressively, raised its policy rate, reduced its involvement in quasi-fiscal activities and began repositioning the institution around its traditional mandate of price and financial stability. The Bank itself now describes the rollback of quasi-fiscal operations, cessation of deficit financing beyond statutory limits and stronger monetary-fiscal coordination as key components of its monetary-policy reforms.

The point, therefore, is not that Nigeria suddenly discovered fiscal-monetary coordination in September 2026. Rather, the authorities are attempting to turn coordination from an administrative necessity into an operating system.

 Complementary groundwork 

For Cardoso, the timing is particularly significant because Nigeria is attempting to complete its transition towards an inflation-targeting framework.

Inflation targeting cannot operate effectively if monetary policy is attempting to suppress demand while fiscal policy simultaneously generates new liquidity or places unpredictable financing pressures on the financial system.

As Cardoso put it at the MPC, inflation targeting is a journey on which countries can suffer serious policy missteps if they attempt to proceed with only one “leg”.

His argument was blunt: monetary policy cannot carry the entire burden.

The MoU, therefore, represents what he described as an important addition to the inflation-targeting journey.

It provides a formal mechanism around government cash management, debt issuance planning, liquidity forecasting, macroeconomic analysis and periodic consultations.

In practical terms, that means the CBN should have better visibility into the government’s financing requirements, while fiscal authorities should have a clearer understanding of how borrowing and cash-management decisions affect liquidity, interest rates and monetary conditions.

That is potentially a major departure from policy-making in silos.

Old fault line

The historical problem was straightforward but difficult.

Government needs money to finance its budget and development programmes. The CBN needs to manage liquidity and maintain price stability. The government can therefore regard liquidity as a financing resource, while the central bank can view excessive liquidity as an inflationary risk.

The same transaction can consequently have two different policy meanings.

Government borrowing can finance roads, schools or other public expenditure. But if poorly timed or excessive, it can also absorb liquidity and influence interest rates.

Central-bank tightening can help restrain inflation. But higher rates increase the government’s debt-servicing burden and can make domestic borrowing more expensive.

Exchange-rate movements provide another intersection. A weaker naira can increase import costs and inflation, while fiscal decisions affecting demand, revenue and borrowing can feed into currency pressures.

Minister of Finance and Coordinating Minister of the Economy, Mr. Taiwo Oyedele, captured the interconnectedness succinctly when he observed that government borrowing affects liquidity and interest rates; monetary policy affects government financing costs; exchange rates and tariffs influence prices and revenue; government spending affects demand; and agricultural policy can influence food inflation.

The MoU is therefore an attempt to ensure that policymakers see these relationships before decisions are made—not after their effects have appeared in the data.

The 350bps reset and the MoU

The timing has inevitably linked the agreement to the CBN’s dramatic 350-basis-point reduction in the Monetary Policy Rate, from 26.5 per cent to 23 per cent, announced after the September 2026 MPC meeting.

That move should not, however, be described as a 350bps reduction in inflation.

The latest NBS data show headline inflation at 15.39 per cent on the current 2024-base CPI series.

Nor is it yet possible to establish a direct causal relationship between the MoU signed on September 18 and the MPC’s rate decision announced on September 22.

What can reasonably be said is that the two developments form part of the same broader policy environment: disinflation, improved macroeconomic conditions, greater emphasis on policy transmission and a deliberate attempt to align fiscal and monetary policy.

That distinction matters.

The MoU may support the conditions under which disinflation becomes more durable, but four days is far too short a period to claim that the agreement itself produced the latest monetary-policy reset or caused the decline in inflation.

Oyedele’s structural test

For Oyedele, the deeper challenge lies beyond the CBN’s policy rate. The minister has argued that bringing inflation sustainably into single digits requires action against the structural sources of price pressure—food, energy, transportation, logistics and imported costs.

That shifts the debate from whether the CBN can suppress inflation to whether government can reduce the pressures that continuously push prices upward.

On agriculture, the policy response includes stronger grain reserves, improved seeds and yields, irrigation, climate resilience and better rural roads.

On transportation, the minister has pointed to unnecessary road levies and poor farm-access infrastructure as hidden costs that ultimately appear in food prices.

On energy, he has argued for price stability without returning to what he described as distortionary consumption subsidies.

And on economic statistics, he has advocated a broader information base, including a Producer Price Index and stronger employment and productivity data.

This is important because headline inflation tells policymakers what happened to prices. More granular data can help them understand why prices moved.

That distinction becomes even more important under an inflation-targeting regime.

The credibility test

Oyedele’s most significant warning was that the MoU must outlive the personalities who signed it.

“Strong economies are not built around strong personalities. They are built around strong institutions,” he said.

That is also where the real test of the agreement begins.

A memorandum can establish meetings. It can require data-sharing. It can create calendars and committees.

It cannot, by itself, guarantee fiscal discipline.

Nor can it eliminate the competing objectives that inevitably arise between a government seeking growth, infrastructure and social intervention and a central bank seeking to contain inflation and preserve monetary stability.

The success of the arrangement will therefore depend on what happens when the interests of the two institutions diverge.

Will government financing plans be sufficiently predictable for the CBN to incorporate them into liquidity forecasts?

Will debt issuance be better synchronised with monetary operations?

Will government cash balances be managed in a manner that reduces unexpected liquidity shocks?

Will fiscal interventions designed to cushion households from inflation be assessed for their monetary consequences?

And, critically, will the CBN retain the freedom to tighten or ease monetary policy when its assessment of inflation requires it?

Oyedele has already provided the governing principle: coordination should not become fiscal dominance.

That distinction is central.

Oye’s warning on the next phase

Chairman, Alliance for Economic Research and Ethics, Hon. Dele Kelvin Oye sees the MoU as potentially important to the new monetary-policy phase, but his emphasis is on implementation.

He linked the framework to the recent rate reset, noting  that closer coordination on forecasting, information-sharing, government financing and cash management could strengthen the environment for monetary policy.

But he has also cautioned against interpreting the 350bps rate reduction as the beginning of an automatic easing cycle. That warning is significant.

The danger after a large rate cut is that markets, businesses and government may interpret the decision as a permanent change of direction rather than a policy response to prevailing economic conditions.

Oye has consequently urged the Finance Ministry to give practical effect to the MoU through a consolidated and regularly updated government financing calendar aligned with liquidity forecasts and debt-issuance plans.

His reading of recent credit data also illustrates why the fiscal side matters.

Net credit to government, according to the figures he cited, fell from about N33.92 trillion in July to N32.70 trillion in August, while credit to the private sector rose from about N83.43 trillion to N84.55 trillion.

Those movements do not, on their own, prove that government borrowing had been crowding out private-sector credit.

But they underline the central question confronting the new framework: how much of the financial system’s liquidity should be absorbed by government and how much should ultimately support businesses and households?

That question will become increasingly important if the CBN’s lower policy rate is expected to translate into cheaper and more accessible credit.

Beyond a document

There is therefore a larger story behind the MoU.

Nigeria is attempting to move away from a monetary framework in which the CBN is repeatedly called upon to compensate for fiscal pressures, supply shocks, exchange-rate weakness and structural inefficiencies.

Cardoso’s three-year monetary-policy journey has increasingly been about restoring the boundary between fiscal and monetary responsibilities while simultaneously improving coordination between them. That may sound contradictory. But it is not.

Independence without coordination can produce policy conflict. Coordination without independence can produce fiscal dominance.

The institutional challenge is to achieve the first without falling into the second.

That is why Cardoso’s remarks at the MPC are perhaps more revealing than the signing ceremony itself.

He was not presenting the MoU as proof that fiscal and monetary authorities had suddenly discovered one another.

He was making a more consequential argument: that Nigeria’s macroeconomic management can no longer depend on whether particular individuals happen to maintain a good working relationship.

The agreement seeks to make cooperation predictable.

It seeks to ensure that fiscal policy knows what monetary policy is trying to achieve, while monetary policy understands the financing realities confronting government. It also seeks to make inflation targeting a joint macroeconomic project rather than a task assigned almost entirely to the central bank.

Nonetheless, Cardoso, sees the new partnership as an “icing on the cake” after a series of monetary and institutional reforms.

Oyedele said the MoU attempted to make policy coordination a permanent feature of economic governance while referred to it as the real test will be whether the architecture produces disciplined financing, better liquidity management and data-driven monetary decisions.

Ultimately, however, the MoU will be judged neither by the ceremony nor by the elegance of its language.

It will be judged when the next fiscal shock arrives.

If government borrowing rises, will the CBN know early enough? If liquidity surges, will fiscal and monetary authorities respond from a common playbook?

If inflation accelerates again, will both sides accept the difficult measures required?

And if inflation continues to moderate, can lower interest rates translate into more credit without reigniting the very price pressures the CBN has spent years trying to extinguish?

Those are the questions that will determine whether Cardoso’s new fiscal-monetary covenant becomes another policy document—or the institutional foundation for a more coherent economic regime.