CBN MPC member warns unchecked fiscal spending could derail inflation

Nigeria's central bank faces a critical juncture as two powerful forces threaten to unwind months of inflation-fighting gains: uncontrolled fiscal spending by government and mounting pressure for wage increases from a cost-of-living crisis. Professor Murtala Sabo Sagagi, a member of the Central Bank of Nigeria's Monetary Policy Committee, has sounded an alarm that fiscal discipline cannot be abandoned, particularly during politically sensitive periods when government spending tends to spike.

The warning comes at a pivotal moment. Nigeria's headline inflation, which peaked above 34% in mid-2024, has been gradually cooling—but only because the CBN has maintained one of Africa's most aggressive interest rate hiking cycles. The policy rate now sits above 27%, making borrowing prohibitively expensive for businesses and households alike. Yet these monetary tightening efforts risk being negated if government spending spirals unchecked, injecting fresh liquidity into the economy and reigniting price pressures.

## Why is fiscal spending derailing inflation control?

When government spends beyond its revenue—whether through wage increases, infrastructure projects, or subsidies—it injects naira into the economy faster than the CBN can absorb it. This excess liquidity chases a limited supply of goods, pushing prices higher. The CBN's rate hikes work to reduce demand by making credit expensive; but if fiscal authorities simultaneously loosen the purse strings, monetary policy becomes a tug-of-war that inflation wins. Sagagi's concern reflects a fundamental tension: the central bank cannot fight inflation alone if the fiscal authorities aren't aligned.

## What's driving the wage increase demands?

Workers across Nigeria are facing real purchasing power collapse. The naira has depreciated sharply against the dollar—losing over 60% of its value since 2021—while inflation has eroded wages further. A factory worker earning ₦30,000 monthly in 2020 can now buy roughly one-third of what that salary purchased four years ago. Public sector workers last received a meaningful wage increase in 2019 (the ₦30,000 minimum wage). International Workers' Day speeches this year echoed previous years' empty promises, but the pressure from unions is intensifying, and government may face strikes or unrest if it resists adjustment.

The political economy is treacherous. An election year or post-election period typically sees higher spending as governments consolidate power or deliver on campaign promises. If fiscal authorities grant substantial wage increases—widely expected by mid-2025—without offsetting revenue measures, the naira money supply could surge just as the CBN is trying to reduce it.

## What are the market implications?

A fiscal-monetary policy collision would likely trigger a second wave of inflation, forcing the CBN to hike rates even higher. This would further compress business margins, slow credit growth, and risk pushing Nigeria toward recession. Asset prices—equities and bonds—would face renewed selling pressure. Conversely, if government enforces wage restraint to preserve fiscal discipline, political backlash could destabilize the administration and undermine social cohesion in an already fragile security environment.

The optimal path requires fiscal consolidation (revenue-raising reforms like VAT expansion or subsidy removal) paired with targeted wage relief for the lowest earners—but political will for this remains elusive.