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CBN Monetary Policies Yielding Results, but Fiscal Challenges Loom

After months of trial and error, the Central Bank of Nigeria (CBN) appears to be on the right track with its monetary policies. The exchange rate is stabilizing, and the gap between the official and parallel market rates has significantly narrowed. For the first time in years, Nigeria is close to achieving a relatively stable exchange rate, which is crucial for economic planning and investor confidence. However, economists like Bismarck Rewane have pointed out that the CBN’s efforts to support the Naira remain unsustainable without complementary fiscal policies. The gains made so far could be temporary if the underlying structural issues in the economy are not addressed.

While the CBN’s monetary policies have shown positive results, sustaining these gains requires robust fiscal policies and increased productivity across key sectors of the economy. Nigeria’s Gross Domestic Product (GDP) growth hinges on real productivity improvements, not just statistical rebasing or other superficial measures. Four critical sectors—petroleum, agriculture, manufacturing, and essential services—must see significant output increases to consolidate the CBN’s achievements.

Petroleum Sector: Potential vs. Reality

Officials in the crude oil sector have recently announced that Nigeria now has the capacity to produce up to 2.24 million barrels per day (mbpd). However, this declaration appears more political than practical. Nigeria’s actual production for January 2025 fell short of this target, and February’s output is unlikely to reach 2 mbpd. Cumulatively, production for the first two months of 2025 is expected to record a negative variance, which may not be corrected within the year.

Moreover, Nigeria’s OPEC quota of 1.7 mbpd (excluding condensates) limits its ability to ramp up production without facing backlash from the global market. The long-term outlook for crude oil demand is also unfavorable, as the world shifts away from fossil fuels. Nigeria’s reliance on crude oil as its economic backbone is increasingly becoming a defective model.

Agriculture: Promising but Challenged

Agriculture holds promise, with increased spending by the federal and state governments. However, the approach remains traditional rather than innovative. While tractors from Belarus have arrived, their numbers are insufficient to make a significant impact. Additionally, the lack of trained operators and spare parts has historically rendered such equipment useless after the first breakdown. The Nigerian landscape is littered with abandoned tractors, now being scavenged by scrap dealers.

Other challenges include rising fertilizer costs, a shortage of farm labor, and the pervasive threat of banditry, which has made farming a perilous venture. Despite these obstacles, agriculture remains a critical sector for Nigeria’s economic transformation.

Manufacturing: High Costs and Low Demand

The manufacturing sector is grappling with uncertainty. Members of the Manufacturers Association of Nigeria (MAN) aim to increase capacity utilization to drive down costs and reduce prices. However, rising energy, power, and communication tariffs, coupled with high interest rates, are undermining these efforts. Increased taxes and levies by government agencies further raise production costs, leading to higher prices and declining consumer demand.

Manufacturers had hoped for a reduction in interest rates following a rebasing exercise that slashed inflation rates by 10%. However, the CBN’s decision to maintain existing rates has left the sector burdened by high borrowing costs, stifling long-term investments.

Essential Services: Struggling Amid Economic Hardship

Essential services, including healthcare, education, and telecommunications, are also feeling the pinch of reduced consumer purchasing power. General hospitals, once the last hope for the masses, are experiencing declining patronage as the cost of laboratory tests and drugs rises. Many Nigerians are turning to alternative healthcare providers due to affordability concerns.

The Information and Communications Technology (ICT) sector, one of the largest in the economy, has seen its growth rate drop to 5.42% in 2024, the lowest since 2022. This decline reflects broader economic challenges, with consumers cutting back on calls and data usage. MTN’s significant losses in 2024 underscore the sector’s struggles, as the network pushes for higher charges to offset declining revenues.

Fiscal Challenges: The Elephant in the Room

Crude oil revenue remains the backbone of Nigeria’s national budget, but the federal government has consistently fallen short of its revenue targets over the past decade. This shortfall has led to increased borrowing, rising debt levels, and underfunded capital projects. Roads, power supply, education, and healthcare services have all suffered as a result.

The current pattern of fiscal failure is repeating itself, with federal, state, and local governments facing declining real revenue allocations. Inflation has eroded their ability to fulfill political promises, and the exchange rate’s double-edged impact—while publicly supported—is privately resented. Devaluation and high prices have driven up Value Added Tax (VAT) collections, but a reversal could reduce revenue allocations across all tiers of government.

Conclusion: A Call for Holistic Reforms

While the CBN’s monetary policies have brought temporary stability, Nigeria’s economic challenges require comprehensive fiscal reforms and increased productivity across key sectors. Without addressing these underlying issues, the gains made so far may prove fleeting. The federal government must prioritize sustainable economic policies, invest in critical infrastructure, and create an enabling environment for businesses to thrive. Only then can Nigeria achieve long-term economic stability and growth.

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