CBN flags liquidity surge, election spending as risks to recovery

THE Central Bank of Nigeria (CBN) has cautioned that Nigeria’s fragile economic recovery could be derailed by excess liquidity in the financial system and expansionary spending associated with election cycles.

CBN Governor, Mr Yemi Cardoso, issued the warning on Tuesday at the National Economic Council (NEC) conference held at the Presidential Villa, Abuja. He said that although recent reforms and monetary tightening have helped stabilise markets, the gains remain vulnerable to reversal.e

According to the apex bank, a large liquidity overhang is still present in the financial system, creating renewed risks of inflation and exchange rate volatility. The bank also noted that election periods historically inject huge amounts of cash into the economy, often weakening the impact of monetary policy and undoing earlier reforms.

CBN stressed that protecting price stability will depend on tighter liquidity control, close coordination with fiscal authorities, and sustained structural reforms across the economy.

‘Monetary tightening alone not enough‘

Mr Cardoso said Nigeria’s macroeconomic environment is still shaped by deep structural weaknesses and policy inconsistencies that interest rate hikes alone cannot fix.

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He explained that while past interventions stabilised markets in the short term, they also left behind distortions that continue to complicate liquidity management.

“No central bank can sustainably deliver low and stable inflation alone where structural drivers such as food supply shocks, high energy costs and infrastructure deficits dominate price formation,” he said.

The CBN governor disclosed that intervention programmes totalling N10.93 trillion offered temporary relief to the economy but contributed to long-term structural imbalances.

He reiterated that lasting stability will require fiscal discipline, supply-side reforms and strong institutional coordination, beyond conventional monetary tools.

Structural limits to monetary policy

Mr Cardoso outlined several factors reducing the effectiveness of interest rate decisions in Nigeria, including: weak credit transmission mechanisms, shallow financial markets, and large informal sector.

He said structural inflation drivers continue to dominate price formation, while persistent supply-side pressures limit the CBN’s ability to manage liquidity effectively.

To reinforce macroeconomic stability, he called for stronger revenue mobilisation and more efficient public spending.

He added that policy alignment between monetary and fiscal authorities is crucial, with the CBN maintaining a disciplined interest rate path while fiscal agencies strengthen debt management and public financial governance.

States now key to macroeconomic stability

The CBN also identified subnational governments as increasingly influential players in Nigeria’s macroeconomic framework.

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Mr Cardoso said state governments now control about half of federation account revenues, giving them significant influence over liquidity levels, inflation trends and growth outcomes.

He noted that higher revenues from recent reforms have increased the macroeconomic impact of state-level fiscal decisions.

According to him, infrastructure spending by states can ease structural inflation pressures, while sustainable borrowing frameworks are needed to curb future fiscal risks.

He stressed that cooperation between state governments and the financial system is vital for expanding financial inclusion, improving access to credit and sustaining reform momentum.