Reset and Resolve: How the CBN Reclaimed Monetary Policy and Stabilized the Naira Amid Subsidy Shocks
By Decisionmakers Online
When the current leadership of the Central Bank of Nigeria assumed office in 2023, it inherited an economy under severe strain. Inflation was already above 22%, the foreign exchange market was split into multiple windows that encouraged arbitrage, and public confidence in monetary policy was at a low point. Within weeks of that transition, the federal government announced the removal of fuel subsidy, a fiscal decision that sent petrol prices soaring and immediately fed into transport fares, food costs, and inflation expectations across the country. The timing could not have been more challenging. The CBN was being asked to provide stability at the very moment a major fiscal shock was being unleashed on households and businesses.
The context mattered because for years prior to 2023, the lines between monetary and fiscal policy had become blurred. The Bank had been involved in extensive development finance interventions, quasi-fiscal operations, and the management of several exchange rate windows. These activities, while well-intentioned, weakened the CBN’s focus on its core mandate of price and monetary stability. When subsidy removal hit, it exposed how vulnerable the economy was to any policy distortion. Without a credible monetary anchor, the price shock risked spiraling into entrenched inflation and a deeper currency crisis. The central bank therefore faced a dual test: to contain the fallout from a necessary but painful fiscal reform, while also rebuilding its own credibility.
The response was a deliberate reset back to orthodoxy. First, the Bank moved aggressively on inflation. Between 2023 and 2025, the Monetary Policy Committee raised interest rates in successive meetings, lifting the policy rate from 18.5% to over 27% at its peak. The Cash Reserve Ratio for banks was also increased to as high as 45%, pulling excess liquidity out of the system. Lending rates climbed above 30% and borrowing became more expensive, but that was the point. By making naira assets more attractive and signaling that it would not finance government deficits, the CBN sought to anchor expectations and prevent the subsidy shock from becoming a wage-price spiral. It was a painful adjustment, especially for businesses and households already feeling the weight of higher costs, but it established a clear principle: price stability would take precedence.
The second pillar of the reset was the foreign exchange market. On June 14, 2023, the CBN collapsed all FX windows into a single Investors’ and Exporters’ window and adopted a willing-buyer, willing-seller model. This ended years of multiple rates that had distorted trade, investment, and public trust. To back the reform, the Bank moved to clear a backlog of about $7 billion in FX obligations owed to airlines, manufacturers, and other foreign entities. It also reintroduced Bureau De Change operators under stricter oversight to improve access at the retail level. The immediate effect was volatility. The naira depreciated sharply as it adjusted to market realities. Yet over time, transparency improved, and inflows began to respond. Portfolio investments rose, diaspora remittances became more formalized, and by mid-2025 the gap between the official and parallel market rates had narrowed from over 60% to less than 5%. What had looked like chaos in the early months gradually gave way to a more predictable, market-reflective system.
What made this reset work, despite the structural headwinds, was not that Nigeria’s underlying problems disappeared. Food inflation remained stubborn due to insecurity and supply chain gaps. Power and logistics costs stayed high. Credit to the real sector slowed because of elevated interest rates. Rather, the reset worked because policy became consistent and communicative. The CBN published clearer MPC communiqués, offered forward guidance, and engaged more regularly with analysts and the media. That predictability mattered more to markets than the absolute level of rates. At the same time, there was a critical separation between monetary and fiscal roles. While the government pursued subsidy removal and tax reforms, the central bank resisted pressure to monetize deficits. That discipline prevented the fiscal adjustment from overwhelming the monetary framework.
The results, while incomplete, are visible. Portfolio inflows reached $3.2 billion in 2024, the highest in five years. Exchange rate volatility eased significantly after the second quarter of 2024. Dollarization in the banking system slowed as confidence in naira instruments returned. These are not endpoints, but signals that the foundation is being rebuilt. The deeper structural challenges — from food production to infrastructure — remain outside the direct control of monetary policy. And the trade-off is real: tighter money has helped contain inflation but has also made credit more expensive for SMEs and manufacturers.
In the end, the CBN’s actions since 2023 represent a shift from crisis management to policy management. Faced with subsidy removal and entrenched structural weaknesses, the Bank chose targeting over tinkering and stability over short-term optics. The naira is not fixed, but it is now priced by the market. Inflation is not defeated, but it is being contained within a credible framework. That distinction is important. It means Nigeria now has a monetary policy that functions like monetary policy again — focused, transparent, and rules-based.
Whether this translates into sustained growth will depend on whether fiscal policy maintains discipline and whether structural reforms in agriculture, energy, and security keep pace. For now, the central bank has done what was required of it in a difficult moment. It reset the rules, absorbed the initial shock, and created space for the rest of the economy to adjust. That is the essence of the reset, and the reason the Naira and inflation outlook look less fragile today than they did in 2023.
