How CBN Contributed To Rising Inflation – Moghalu

Former Deputy Governor of the Central Bank of Nigeria (CBN), Kingsley Moghalu, has blamed the country’s inflation on the apex bank’s continuous financing of the federal government’s deficits.

Moghalu said inflation would continually rise inasmuch as the ways and means are used to service the government’s deficits, adding that the standard definition of inflation is not only just about too much money chasing too few goods but also a cost-push factor.

The political economist and former presidential aspirant made this known in an interview with ARISE TV.

Recall that the FG borrowed N6.3 trillion from the CBN in the first 10 months of 2022 through the ways and means advances, and earlier in May 2023, the Senate approved the sum of N22.7 trillion CBN loan spent by the executive arm of the government.

In May 2023, the Senate amended the CBN Act, increasing the ways and means borrowing threshold from 5 to 15 per cent for the federal government.

In his clarifications on this with increased inflation rates, Moghalu said the inflationary impact “is the biggest and immediate threat”, in such a time of the removal of petrol subsidy and naira float.

“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 were 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”.

Moghalu said, “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”.

“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.”

In his argument, the former CBN deputy governor said the apex bank needs to be independent and from the influence of the government to effectively manage inflation.

“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.”

“That’s why we talk about central bank independence because it is necessary to checkmate what we call the time inconsistency problem.”