PRICE STABILITY, DEVELOPMENT AND THE ROLE OF THE CBN

** Price and financial stability remain the apex bank’s prime obligations, argues RISLANUDEEN MUHAMMAD**

Nigeria has spent the past three years absorbing one of the most compressed macroeconomic adjustments in its history. The removal of the petrol subsidy, the unification and progressive liberalisation of the foreign exchange market, and a sustained tightening cycle at the Central Bank of Nigeria (CBN) have together imposed real costs on households and firms. Petrol prices rose sharply, the naira depreciated before beginning to stabilise, and borrowing costs climbed to levels that priced many small businesses out of the credit market. These were not comfortable choices, and the people who bore them did not choose the timing.

There are now signs that the adjustment is producing results. Headline inflation, which peaked above 34 per cent in 2024, has fallen for several consecutive months and stood at 15.43 per cent in July 2026, down from 15.91 per cent in June, according to the National Bureau of Statistics. The naira has firmed to around N1,346 to N1,349 per dollar in the official market in August 2026, its strongest position in roughly five months, while the parallel market premium has narrowed. External reserves reached $52.66 billion by 19 August 2026, a 17-year high and an increase of more than $7 billion since the start of the year. Real GDP grew by 3.89 per cent year-on-year in the first quarter of 2026, continuing a run of expansion led by the non-oil economy.

These numbers matter, but they are not the test that most Nigerians apply. A falling inflation rate that still sits above 15 per cent, with food inflation climbing back to 20.31 per cent in July, does not feel like relief at the market stall. Reserve accumulation and exchange-rate stability are preconditions for investment, not investment itself. The open question, and the one this essay tries to answer, is what happens after stabilisation. Does the Central Bank’s return to orthodoxy simply hold the line on prices, or can it be designed to also widen the base of people and firms who can borrow, save, insure and build on that stability? The answer determines whether the last three years of sacrifice convert into a platform for growth or remain, in the public mind, an exercise in balance-sheet repair.

It is tempting, especially for those who experienced the acute cost-of-living pressure of 2023 and 2024, to treat the CBN’s price-stability mandate as a technocratic preoccupation disconnected from ordinary welfare. The opposite is closer to the truth. Section 2 of the CBN Act 2007 assigns the Bank responsibility for ensuring monetary and price stability, issuing the legal tender currency, maintaining external reserves, promoting a sound financial system and acting as banker and adviser to the Federal Government. Price stability sits at the centre of that list, not as an afterthought but as the foundation the other functions depend on.

The reason is distributional as much as macroeconomic. Inflation is a regressive tax. Households with limited savings and no access to inflation-hedged assets absorb the full force of rising prices, while wealthier households can shift into dollars, property or equities. Nigeria’s own experience between 2021 and 2024 illustrated this starkly: food inflation, which weighs most heavily on the poorest households because food accounts for a larger share of their spending, consistently outpaced headline inflation. When prices rise unpredictably, workers cannot negotiate wages that keep pace, pensioners watch fixed incomes erode in real terms, and small traders find that the naira they receive today buys less than the stock they must replace tomorrow.

Inflation also punishes the kind of long-horizon investment that development requires. A manufacturer deciding whether to commit capital to a five-year plant expansion needs some confidence about future costs, financing terms and the exchange rate. High and volatile inflation shortens that horizon, pushing capital toward short-term trading activity and away from productive investment with longer payback periods. It also raises the risk premium lenders demand, which is one reason Nigerian real lending rates have remained elevated even as headline inflation has moderated. A credible, rules-based central bank that anchors inflation expectations is not opposed to development. It is one of the conditions that makes patient capital possible.

None of this means inflation control is sufficient. But treating it as separate from, or in tension with, development policy misreads both the CBN Act and the economics of who actually pays the price when a central bank loses control of the price level.

The case for price stability does not settle the harder question of how much weight the policy rate can bear when inflation has multiple, only partly monetary, causes. The Monetary Policy Committee has held the benchmark rate at 26.5 per cent since February 2026, having cut it by 50 basis points from 27 per cent, and it maintained that stance again at its 306th meeting on 20 and 21 July 2026, alongside a Cash Reserve Ratio of 45 per cent for deposit money banks. That is a genuinely restrictive stance by any recent Nigerian standard, and it has coincided with disinflation. But the composition of Nigeria’s inflation basket complicates the story the policy rate alone can tell.

Food inflation rose to 20.31 per cent year-on-year in July 2026 even as headline inflation fell, driven by the price of items such as rice, tomatoes, onions, garri and plantain. These are not goods whose prices respond primarily to the interest rate banks charge on working-capital loans. They respond to the cost of diesel used to move produce from farm to market, to insecurity in food-producing states, to the price of imported fertiliser and agrochemicals, to post-harvest losses from poor storage infrastructure, and to the pass-through effect of exchange-rate movements on imported staples and inputs. Energy costs, since the removal of the petrol subsidy, feed into the price of almost everything transported by road. Insecurity in parts of the North West and North Central, which has depressed farming activity in historically productive states, is a supply constraint no policy rate can repair.

This distinction between demand-driven and supply-driven inflation matters because the instruments used to fight them are different, and using the wrong instrument has costs. Raising the cost of credit to cool demand, when a meaningful share of price pressure originates in transport, security and agricultural productivity, can suppress investment and consumption without addressing the underlying supply constraint. Private-sector credit did expand to N83.26 trillion by June 2026, up from N81.04 trillion in May, and the CBN’s own Credit Conditions Survey for the second quarter reported easing credit supply and falling default rates. That is encouraging, but it has occurred alongside a lending-rate environment that remains high by historical standards, and credit to government has grown faster than credit to the private sector over the past year, a pattern that itself deserves scrutiny in any account of monetary transmission.

None of this is an argument for abandoning tight monetary policy while inflation remains in double digits. It is an argument for honesty about what tight money can and cannot do. A central bank that quietly stops pretending the policy rate is a comprehensive anti-inflation tool, and instead treats it as one instrument among several aimed at price stability, financial-system health and, where structural bottlenecks are the binding constraint, coordinated action with fiscal and sectoral authorities, is more credible than one that keeps reaching for the same lever regardless of what is actually driving prices.

Nigeria is not the first country to face the question of how a central bank should relate to development, and the comparative record is more instructive when read for institutional design rather than for slogans.

Malaysia offers the clearest example of a central bank that has combined credible monetary and financial stability with a statutory orientation toward sustainable growth. Bank Negara Malaysia’s founding law lists the promotion of monetary and financial stability conducive to sustainable growth as an explicit object, but price stability remains monetary policy’s primary objective, and the Bank has built its developmental contribution mainly through financial-sector deepening, payment-system modernisation, Islamic finance infrastructure and targeted, transparently governed financing schemes for small and medium enterprises delivered largely outside the central bank’s own balance sheet. The lesson is not that a dual mandate automatically produces better outcomes, but that a hierarchy, clearly stated in law, can coexist with a genuine development function if the instruments used are financial-infrastructure instruments rather than open-ended credit allocation.

India offers a complementary lesson, weighted toward financial inclusion and market development rather than credit direction. The Reserve Bank of India has pursued payments modernisation through the Unified Payments Interface, expanded formal banking access through initiatives such as the Jan Dhan Yojana programme, and deepened debt and derivatives markets, all while retaining inflation targeting, formally adopted in 2016, as its primary monetary-policy anchor. India’s central bank did not achieve inclusion by subsidising credit through its own balance sheet. It achieved it by building the rails, the identity infrastructure and the market institutions that let commercial lenders and fintechs reach previously unbanked populations at scale. That is precisely the category of function the concept behind this essay identifies as legitimately catalytic for the CBN: payments, credit information, collateral registries and market depth, rather than direct subsidy.

The historical Asian experience of directed credit, in Japan’s postwar decades and in Korea under Park Chung-hee, is the case that requires the most care, because it is also the case most often invoked, selectively, by advocates on both sides of Nigeria’s debate. Japanese and Korean policy banks and central banks did direct credit toward targeted industrial sectors, and those sectors did, in aggregate, contribute to rapid industrialisation. But that credit direction operated inside a state apparatus with strong bureaucratic capacity, export-performance discipline that punished firms failing to compete internationally, and financial-sector oversight that, for a period, contained the moral hazard such lending creates. It also eventually produced real costs: connected lending, asset-price bubbles, and, in Korea’s case, a banking crisis in 1997 that required a painful restructuring under IMF supervision. Nigeria’s institutional starting point, its history with intervention funds, its weaker export-discipline mechanisms and its more contested governance environment, means the transferable lesson from Japan and Korea is not “direct credit toward priority sectors.” It is that directed credit can work only inside a framework of export or performance discipline, strong supervisory capacity and clear exit rules, conditions that have to be built deliberately rather than assumed.

The United States is worth a brief mention only as a mandate comparator. The Federal Reserve operates under a statutory dual mandate of maximum employment and stable prices, but it pursues that mandate almost entirely through monetary policy and financial supervision, not through direct sectoral credit allocation, and its developmental role has historically run through fiscal policy, public investment and, more recently, industrial-policy instruments located outside the central bank. It is a useful reminder that a dual mandate in law does not by itself imply an activist industrial role for a central bank; the instruments matter more than the wording of the statute.

Across these cases, one caution recurs. None of Malaysia’s, India’s or Korea’s development outcomes were produced by central-bank action alone. Fiscal policy, industrial strategy, trade policy, education and institutional capacity did the heavier lifting, with the central bank contributing stability, market infrastructure and, in some historical cases, credit channels operating under discipline that does not currently exist in Nigeria’s intervention-fund architecture. Any Nigerian settlement that reads these cases as licence for the CBN to resume broad-based directed lending is reading them selectively.

Nigeria’s own intervention record, assessed on its merits

The CBN’s development interventions of the past decade deserve an assessment that neither dismisses their achievements nor excuses their costs. On the positive side of the ledger, Nigeria’s progress in payments infrastructure, financial inclusion and market development has been genuine. Instant-payment rails, agent-banking networks and mobile-money growth have expanded formal financial access for millions of Nigerians who previously operated entirely in cash. These are exactly the kind of enabling, infrastructure-building functions this essay argues the CBN should continue to prioritise.

On the other side, the record of intervention funds such as the Anchor Borrowers’ Programme, and of the CBN’s broader quasi-fiscal activity through facilities like Ways and Means financing to the Federal Government, raises questions that deserve dispassionate rather than personalised scrutiny. Ways and Means advances, intended as short-term overdraft financing to smooth government cash flow, grew over several years into a large, effectively long-term source of deficit financing that blurred the line between monetary and fiscal policy and contributed directly to the inflationary pressure the Bank was simultaneously trying to contain. Several intervention funds disbursed credit through processes that were not always transparent about eligibility, pricing or loss allocation, leaving default rates and fiscal exposure difficult for outside observers to assess with confidence. Credit to government has continued to grow rapidly, reaching N40.03 trillion in the banking system by June 2026, up sharply from N22.99 trillion just a year earlier, a pace that, if it persists, will keep testing the boundary between fiscal financing and monetary discipline regardless of what the MPC decides about the policy rate.

The point of naming these episodes is not to relitigate the tenure of any individual governor. It is that an institution charged with defending the value of the currency cannot simultaneously be the primary financier of the entity whose spending most influences that value, and cannot allocate large volumes of credit outside a framework of public disclosure, without eventually undermining the credibility it needs for its core mandate. Nigeria’s own recent history, not a foreign case study, is the clearest evidence for that proposition.

A settlement: development-compatible orthodoxy

Nigeria does not have to choose between a central bank that fights inflation and one that cares about development. It has to choose between blurred activism and disciplined purpose, and design its institutions accordingly. The following settlement, “development-compatible orthodoxy,” tries to specify that discipline rather than assume it.

Firstly, the hierarchy should be explicit and binding. Price and financial stability remain the CBN’s first-order obligations. Every other function is subordinate to, and must be assessed for compatibility with, that objective. This is not a rhetorical flourish; it should determine which tools the Bank reaches for and which it leaves to other institutions.

Secondly, the CBN’s development role should be framed as a contribution to development rather than responsibility for development. That distinction matters because it locates CBN as one actor among several, not as the guarantor of growth outcomes that depend on fiscal policy, security, infrastructure and human capital investment well beyond monetary policy’s reach.

Thirdly, the Bank’s legitimate catalytic functions should be concentrated in payments modernisation, financial inclusion, credit-information infrastructure, movable-collateral registries, capital-market deepening and improved monetary transmission, the categories where India and Malaysia have demonstrated genuine developmental returns without compromising their inflation objective. These are financial-infrastructure functions, not subsidies, and they belong squarely inside a central bank’s competence.

Fourthly, direct credit subsidies should sit principally with transparently funded, professionally governed development finance institutions, such as the Bank of Industry, the Development Bank of Nigeria and NEXIM, rather than on the CBN’s own balance sheet. Where these institutions currently overlap in mandate or are constrained by inadequate capital, that is a reform priority, and a more productive one than routing subsidised credit back through the central bank because the DFI architecture is imperfect.

Fifthly, exceptional CBN facilities should be permitted only where a clear market failure is demonstrated, and only under published rules covering eligibility, pricing, exposure ceilings, loss-sharing, duration and independent ex-post evaluation. No evergreen facilities. A facility that cannot state in advance how and when it will end is, almost by definition, a subsidy in disguise.

Sixthly, monetary and fiscal coordination should be institutionalised rather than improvised. A published coordination framework between the CBN and fiscal authorities, one that prohibits monetary financing of deficits and preserves the Monetary Policy Committee’s operational independence, would let both sides plan around a stable, predictable relationship rather than the ad hoc accommodations that produced the Ways and Means overhang.

Seventhly, success should be measured in outcomes, not disbursement volume. Additional private credit generated, investment mobilised, productivity gained, jobs created and loan repayment performance are the right metrics. The amount of money announced under an intervention scheme is not.

Whether the CBN Act itself should be amended to explicitly require the Bank to support sustainable growth and productive employment, subject to and without prejudice to price and financial stability, is a genuine institutional option rather than a foreclosed conclusion. Malaysia’s example suggests such language can coexist with monetary discipline if the hierarchy is unambiguous and the instruments are constrained as above. But a statutory amendment is not a substitute for the governance architecture described here; without it, a broadened mandate risks becoming exactly the licence for renewed quasi-fiscal activity this essay argues against. If Nigeria pursues that amendment, it should do so only alongside, not instead of, the accountability rules in points four through seven.

Any specific initiative proposed under this settlement should be required to pass six tests before adoption: does it fit the Bank’s statutory mandate; does it respond to a demonstrated market failure with genuine additionality beyond what private lenders would otherwise provide; is it compatible with the prevailing inflation and financial-stability outlook; does it carry transparent fiscal responsibility and loss allocation; is it time-bound with a credible exit and free of evergreen renewal; and can its economic outcomes be independently measured. A proposal that fails any one of these tests should be redesigned or routed to a fiscal institution, not adopted on the central bank’s balance sheet.

From sacrifice to productive capacity

Reserve buffers, a firmer naira and a lower inflation print are real achievements, and they came at a cost that should not be minimised or forgotten once the headline numbers improve. But macroeconomic stabilisation earns its legitimacy only if it becomes a platform Nigerians can build on rather than an end-state the country is asked to admire from a distance. That requires a central bank disciplined enough to refuse fiscal dominance, competent enough to build the payment, credit-information and market infrastructure that lets private capital do the work of financing production, and transparent enough that everyone, from a market trader in Kano to an investment committee in London, can see exactly where stabilisation ends and development support begins.

The CBN Act already gives the Bank the tools to do the first two of those things. Whether it also needs new statutory language to do the third is a fair question for policymakers to settle deliberately, not a question this essay needs to resolve on the Bank’s behalf. What should not be in dispute is the standard by which any expansion of the CBN’s development role gets judged: mandate fit, demonstrated additionality, inflation compatibility, fiscal transparency, a defined exit, and measurable results. Applied consistently, that standard is what separates development-compatible orthodoxy from the intervention model Nigeria has already tried, and largely paid for.

Dr. Muhammad is former Chief Economist Bank of Industry and member of the Daily Trust Board of Economists. rislanudeen@gmail.com