## 1ngaea2026002

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---

### A. Nigeria’s inflation over time
- Inflation drivers and timeline:
  - Persistently high due to supply side shocks, deficit financing and large exchange rate depreciation.
  - Early 2000s: volatile, double-digit inflation linked to food price shocks, exchange rate pressure, and fiscal dominance.
  - 2010–2016: stabilized near 10 percent under managed exchange rates and periods of improved macroeconomic stability.
  - 2016 oil price shock and associated exchange rate adjustment triggered renewed rise in inflation and higher persistence.
  - 2020–22: accelerated amid COVID pandemic disruptions and loose policies with significant levels of monetary financing.
  - 2023: rose sharply following unification of the exchange rate windows, substantial exchange rate depreciation, and removal of fuel subsidies; part of the increase reflected the lag between exchange reforms (large depreciation) and tightening monetary policy (six months later).
  - 2024–25: peaked with strong exchange rate pass-through and high fuel and food prices.
  - Recent moderation: Average headline inflation declined to 23.3 percent from 29.9 percent in 2024.
- Monetary policy actions and adjustments:
  - Monetary Policy Rate (MPR) increased cumulatively by over 800 basis points, from 18.5 percent in February of 2024 to 26.75 percent in July 2024.
  - Cash Reserve Ratio (CRR) was raised sharply to 50 percent.
  - The CBN used open market operations (OMOs), widened the lending leg of the asymmetric corridor around the MPR, and discontinued central bank financing of the fiscal deficit.
  - These measures tightened domestic financial conditions and contributed to a decline in inflation persistence.
- Foreign exchange reforms and exchange-rate–inflation linkage:
  - Move to unified foreign exchange windows and a B-Match trading platform to improve price discovery and eliminate administrative allocation.
  - Efforts to rebuild international reserves and ease operational constraints to encourage greater participation by exporters and other suppliers of foreign exchange; improved liquidity and turnover contributed to greater exchange rate stability.
  - Equilibrium in the fx market was important to taming inflation, which closely tracks both the official and parallel exchange rate.
  - Periods of sharp naira depreciation (notably 2016 and around the 2023 reform episode) are followed by pronounced increases in inflation with a six month lag, reflecting strong exchange rate pass through to domestic prices.

### B. Composition of inflation
- Food as principal contributor:
  - Between April 2003 and December 2024, food inflation contributed 53.6 percent to the average headline inflation rate of 14.4 percent.
  - Historical food inflation weights:
    - 63.7 percent up to 2010.
    - 50.7 percent until the rebasing of 2025.
    - 28.0 percent after the rebasing in 2025.
  - Contribution in 2025: food contributed 24.5 percent of the 23.3 percent headline inflation in 2025.
- CPI rebasing in 2025:
  - Updated household consumption patterns and significant changes to the composition and weights of the inflation basket.
  - Weight of food declined sharply from over 50 percent prior to the rebasing to about 28 percent.
  - Weights of non-food components such as housing, transport, and other services increased.
  - The rebasing had a mechanical effect on measured inflation, contributing to a downward shift in headline inflation in 2025 and lower measured food inflation; it complicates comparisons with historical inflation outcomes.
- Imported vs domestic food dynamics:
  - Nigeria relies on imported food, which accounts for about 30 percent of consumed food.
  - Domestic food prices often diverge from international food price developments; spikes in international prices do not consistently coincide with upswings in domestic food inflation.
  - Domestic food inflation remains persistently high even after international food prices moderate, influenced by climate events (e.g., severe drought of 2022/23 and widespread flooding in 2024) and fuel-related transport costs (one quarter of retail food prices reflect transport cost).
- Other contributors:
  - Large depreciation episodes raised local-currency costs of imported inputs and tradables, feeding into transport, housing-related items (including energy and utilities), and other market-based services.
  - Recent surge included material increases in contributions from transport and housing, consistent with higher energy and logistics costs and broader pricing spillovers.

### C. Persistence
- Measurement and historical context:
  - Persistence measured by an AR(1) persistence index from a 48-month rolling window.
  - Pre-unification persistence after June 2016 hovered near 1.0, indicating an entrenched, near-unit-root inflation process.
  - Cross-country benchmarks: WAEMU persistence index historically averaged 0.2, rising to 0.55 during 2021–22; CEMAC implied persistence coefficient ranges between 0.87 and 0.92 with baseline 0.868.
- Recent evolution and drivers:
  - Since exchange rate unification of June 2023, persistence edged downwards from about 1.0 to 0.1 by early 2026.
  - Primary driver: exchange rate unification; complementary factors: global moderation in food and energy commodity prices from their 2022 peaks.
  - The 2025 CPI rebasing contributed mechanically to a downward shift in the measured inflation intercept and could reduce the estimated AR(1) coefficient, but the decline in persistence began in mid-2023—before the rebasing.
- Policy implication:
  - Decline in persistence suggests shocks are less entrenched, making price dynamics more responsive to market adjustments and monetary policy tightening and opening opportunity to transition toward a forward-looking, inflation-targeting framework.

### D. Diffusion
- Definition: diffusion is the share of CPI items exceeding specified inflation thresholds.
- Recent patterns:
  - Since end-2024, diffusion measures have eased.
  - More than half of CPI components fell below the 20 and 25 percent inflation thresholds.
  - Nevertheless, more than half remain above 15 percent inflation, indicating broad-based price pressures persist.
- Implication:
  - Persistence and diffusion indicators together suggest securing durable disinflation will require sustained policy credibility and continued macroeconomic discipline.

### E. Expectations
- CBN inflation expectations survey (recently restarted):
  - Downward trend from December 2024.
  - Share expecting higher inflation declined to 28 percent at end 2025, from an average of 54 percent in the second half of 2024.
  - Share expecting lower inflation has remained broadly stable.
  - Share "not sure" increased from 27 percent in the second half of 2024 to 42 percent in December 2025.
- Interpretation:
  - High inflation is no longer universally seen as the norm, reducing the risk that shocks become self-perpetuating and indicating greater sensitivity to policy credibility.
  - Caution: survey responses could reflect backward-looking expectations; the CBN has not set an official inflation target.

### F. Conclusion (inflation)
- Reforms have made inflation in Nigeria less persistent and more responsive to monetary policy action.
- Contributing factors: exchange rate unification, improved market mechanisms, and a tighter monetary stance.
- Outlook and policy requirements:
  - Achieving durable disinflation will require sustained macroeconomic discipline, enhanced policy credibility, strong coordination between fiscal and monetary authorities, and maintaining a credible and tight monetary policy stance supported by clear communication to safeguard disinflation gains and support transition toward a forward-looking, inflation-targeting framework.

---

### Exchange rate regime history and market outcomes
- Pre-2016 regime and shocks:
  - 2008–2014: de facto other managed arrangement, close to a conventional peg with low volatility and sustained intervention.
  - 2014 oil price shock triggered devaluations in 2014-15 and a 2016 announced shift toward a more flexible framework; in practice multiple windows and administrative controls remained while the parallel rate adjusted more freely.
  - Parallel market premium averaged around 30 percent before unification and surged above 70 percent during acute stress episodes (2016-17 and 2020-22).
  - Foreign reserves fell from US$40.7 billion in January 2014 to US$26.6 billion in May 2016.
- Multi-window framework components:
  - official/interbank window (CBN intervened and set reference rate),
  - Investors and Exporters (I&E) window (introduced April 2017; more market-determined),
  - Secondary Market Intervention Sales (SMIS) window (allocated FX to prioritized sectors),
  - Bureau de Change (BDC) window (retail transactions; administrative limits and periodic suspensions).

### June 2023 unification and transition to floating
- On June 16, 2023 the CBN unified exchange rate windows, allowing the official rate to adjust toward market-clearing levels.
- Consequences:
  - Parallel market premium compressed to an average of about 9 percent after unification.
  - Exchange rate adjusted continuously, with volatility rising to around 11.6 percent (transition from infrequent stepwise adjustments to more frequent two-sided fluctuations under a market-determined regime).
  - Part of higher volatility reflects transition effects: market adaptation and settlement of overdue FX obligations.
- Pre-unification official rate behavior: staircase pattern with discrete devaluations (examples: November 2014, November 2015, June 2016, and March 2020); 12-month rolling standard deviation averaged about 2.7 percent.

### Monetary policy recalibration and market rates
- Post-unification policy moves and market responses:
  - Monetary Policy Rate (MPR) increased sharply to 27.5 percent.
  - Money market rates adjusted visibly upward; interbank call rate shows considerably lower volatility than earlier and remains largely within the standing facility corridor, though since August 2025 it has tracked the SDF more closely than MPR, reflecting persistent excess liquidity.
  - Treasury bills and lending rates moved to significantly higher levels.
  - Savings deposit rates rose only modestly, remaining in the 3–7 percent range despite sharp increases in MPR and the deposit facility rate.
- Operational recommendation from text:
  - Align liquidity management operations with the policy stance and streamline the very high cash reserve ratio (CRR), currently at 45 percent, to improve transmission and allow gradual reduction in CRR as inflation declines.

### Interest rate pass-through: patterns and magnitudes
- High-level characterization:
  - Policy-rate transmission improved since exchange rate unification but remains uneven: strongest in wholesale money markets and weakest for retail deposit rates.
  - The interbank call rate exhibits near one-for-one contemporaneous pass-through slope ≈  .97 , indicating short-term wholesale funding conditions closely track policy decisions (note: episodic liquidity spikes inflate the simple correlation).
  - The 91-day Treasury bill yield responds more moderately slope ≈  .   .
  - The average deposit rate displays weak responsiveness slope ≈  .   .
- Regime-dependent transmission (contemporaneous pass-through coefficient γ₀):
  - Other managed arrangement (2007–2016): interbank and T-bill rates moved by about 32 and 90 basis points, respectively, per 100 basis point change in the policy rate (equilibrium β ≈  .  );
  - Stabilized arrangement (2016–2023): transmission broke down; interbank rate moved in the opposite direction due to CBN liquidity injections defending the peg, T-bill and lending rates were unresponsive γ₀ ≈   . ;
  - Post-unification: contemporaneous pass-through surged well above unity for all wholesale rates; deposit rates remained muted across regimes.
- Asymmetric “rockets-and-feathers” pattern:
  - Tightening: a 100 basis-point MPR hike raises T-bill and lending rates by roughly 175–180 basis points on impact.
  - Easing: a comparable cut lowers them by only about 25–30 basis points.
  - Interbank rate responds symmetrically (around 0.6 in both directions); deposit rates show little response either way (around 0.12), both not significant in some specifications.
- Implication:
  - Pass-through operates more through changes in rates than through their levels; strengthening operational framework and liquidity alignment is critical to ensure MPR anchors interbank and transmits to lending and deposit rates.

### Conditional exchange rate pass-through and inflation dynamics
- Framework and identification:
  - Adopted conditional framework of Forbes et al. (2018) and incorporated pre-identified oil market shocks from Baumeister and Hamilton (2019) into a Bayesian VAR.
  - Baseline specification: six variables in Cholesky ordering — (1) oil supply shock, (2) global growth oil-demand shock, (3) the federal funds rate, (4) Nigerian CPI inflation, (5) the official exchange rate, and (6) the monetary policy rate.
  - Exchange rate pass-through (ERPT) defined as ratio between cumulative response of CPI and cumulative response of the exchange rate to a given structural shock at each horizon.
  - Estimation uses bilateral nominal naira/USD exchange rate.
- Baseline findings (shock-dependent outcomes):
  - Global oil supply disruption shocks:
    - Trigger a naira appreciation on impact (cumulative exchange rate response reaching approximately − .  percentage points after six months before gradually moderating).
    - Despite appreciation, CPI increases by approximately 0.65 percentage points cumulatively over 24 months.
    - The implied conditional ERPT is reported as − . 9 at h =    (Figure 8, red line), indicating negative conditional pass-through in this case — oil supply disruptions generate inflation in Nigeria despite associated appreciation because direct cost channels dominate.

### Impulse-response evidence: oil price shocks, external shocks, and fiscal monetization
- Oil demand (global growth) shock:
  - Positive global growth shock raises oil prices and leads to naira appreciation, with cumulative appreciation "at about 1 percentage point after 24 months".
  - Despite appreciation, CPI remains statistically indistinguishable from zero; ERPT is +0.02 at h = 12.
- Contrast supply vs demand-driven oil shocks:
  - Oil supply disruption: cost-push plus physical scarcity elevates transport costs and amplifies inflation even with naira appreciation.
  - Demand-driven oil boom: supply available, pass-through to headline inflation more contained due to offsetting appreciation.
- External financial shocks (U.S. monetary policy):
  - Contractionary US monetary policy shock raises Nigerian CPI by about 0.2 percentage points on impact, increasing to roughly 0.6 percentage points after 24 months.
  - Naira depreciates cumulatively by about 2 percentage points at the 12-month horizon.
  - Conditional pass-through ratio approximately 0.3 at the 12-month horizon; declines over time.
  - Dampening factors: importers treating US tightening as transitory; administered prices shielding parts of CPI.
  - June 2023 subsidy removal and exchange rate unification represent structural break likely strengthening transmission going forward.
- Fiscal extension: monetization and inflation:
  - Fiscal shock identified as one-standard-deviation innovation to monthly change in net claims on central government ΔNCCG = 2.2 trillion NGN over 2007–2025 sample.
  - ΔNCCG distribution context: median monthly change 0.04 trillion NGN; maximum observation 18.9 trillion NGN; mean 0.12 trillion NGN.
  - A one-standard-deviation shock (2.2 trillion NGN) produces a front-loaded rise in CPI reaching about 0.17 percentage points at 12 months and 0.24 percentage points after 24 months.
  - Exchange rate response: naira depreciates sharply on impact, peaking at approximately 1.5 percentage points within first three months, then reversing and oscillating around zero with wide credible bands.
  - Fiscal contribution to CPI variance remains modest at 3.3–3.5 percent.
- Regime change and conditional pass-through:
  - Post-unification: one-standard-deviation exchange rate shock raises CPI by about 0.27 percentage points within 12 months.
  - Pre-unification: using official exchange rate yields muted CPI response close to zero; using parallel market rate yields larger point estimate with cumulative CPI response about 0.65 percentage points after 24 months (wide credible bands).

### Methodology and identification (NIW-BVAR setup)
- Baseline six-variable NIW-BVAR estimated over 2007M1–2025M9.
- Estimation details:
  - Six lags.
  - Each equation contains 37 free parameters (43 in the seven-variable extension).
  - Estimated on 225 observations.
  - Cholesky ordering (baseline six-variable): (1) oil supply shock, (2) oil demand shock, (3) the federal funds rate, (4) Nigerian CPI inflation, (5) the official exchange rate, and (6) the monetary policy rate.
  - Seven-variable extension inserts monthly change in net claims on the central government (ΔNCCG) between the exchange rate and the MPR.
  - Bayesian shrinkage (Normal-Inverse-Wishart prior) used for stable and precise impulse responses given system size relative to sample.

### Conclusions and policy implications
- Regime transition effects:
  - Transition to market-determined exchange rate strengthened interest rate pass-through and altered inflation dynamics associated with exchange rate movements.
  - Exchange rate pass-through is shock-dependent: oil supply disruptions can generate inflation despite currency appreciation; demand-driven oil price increases produce limited inflationary responses.
  - External financial tightening transmits inflation via capital flow and import price channels.
- Operational and policy recommendations:
  - Strengthen operational framework so MPR more effectively anchors the interbank rate and transmits to lending and deposit rates.
  - Align liquidity management operations with the policy stance to reinforce transmission.
  - Streamline the very high CRR (currently at 45 percent) to support improved transmission; as inflation declines, nominal MPR would be expected to fall, easing cost of liquidity absorption and allowing gradual CRR reduction.
  - Build confidence in the domestic currency (via lower and more stable inflation) to ease dollarization pressures, increase demand for naira, reduce structural excess liquidity, and support lower CRR.
  - Recognize that exchange rate pass-through is not a structural constant but depends on shock composition, regime characteristics, and policy credibility; coherent liquidity management and a consistent monetary policy framework are important as Nigeria moves toward a more fully functioning inflation targeting regime.

*Source: IMF staff chapter “Inflation in Nigeria: A Descriptive Analysis of Recent Developments,” May 7, 2026; prepared by Cecilia Melo Fernandes (MCM) and Chris Stumphius (AFR). Joanna Delcambre (AFR) provided editorial support.*

### 1. Headline, Core and Food Inflation, 2001-25 __________________________________________ 3

### 1. Headline, Core and Food Inflation, 2001-25

### A. Nigeria’s Inflation Over Time
- Historically, inflation in Nigeria has been persistently high due to supply side shocks, deficit financing and large exchange rate depreciation.
- Early 2000s: volatile, double-digit inflation linked to food price shocks, exchange rate pressure, and fiscal dominance.
- 2010–2016: inflation stabilized near 10 percent under managed exchange rates and periods of improved macroeconomic stability.
- 2016 oil price shock and associated exchange rate adjustment triggered renewed rise in inflation and higher persistence.
- 2020–22: inflation accelerated amid COVID pandemic disruptions and loose policies with significant levels of monetary financing.
- 2023: inflation rose sharply following unification of the exchange rate windows, substantial exchange rate depreciation, and removal of fuel subsidies.
  - Part of the increase reflected the lag between exchange reforms (large depreciation) and tightening monetary policy (six months later).
- 2024–25: inflation peaked with strong exchange rate pass-through and high fuel and food prices.
- Recent moderation:
  - Tighter monetary policy and greater exchange rate stability helped moderate inflation, though it remains high.
  - Average headline inflation declined to 23.3 percent from 29.9 percent in 2024.

- Monetary policy actions and adjustments:
  - Monetary Policy Rate (MPR) increased cumulatively by over 800 basis points, from 18.5 percent in February of 2024 to 26.75 percent in July 2024.
  - Cash Reserve Ratio (CRR) was raised sharply to 50 percent.
  - The CBN used open market operations (OMOs), widened the lending leg of the asymmetric corridor around the MPR, and discontinued central bank financing of the fiscal deficit.
  - These measures tightened domestic financial conditions and contributed to a decline in inflation persistence.

- Foreign exchange reforms:
  - Move to unified foreign exchange windows and a B-Match trading platform to improve price discovery and eliminate administrative allocation.
  - Efforts to rebuild international reserves and ease operational constraints to encourage greater participation by exporters and other suppliers of foreign exchange.
  - Improved liquidity and turnover in the official foreign exchange market contributed to greater exchange rate stability.

- Exchange rate–inflation linkage:
  - Achieving equilibrium in the fx market was important to taming inflation, which closely tracks both the official and parallel exchange rate.
  - Periods of sharp naira depreciation (notably 2016 and around the 2023 reform episode) are followed by pronounced increases in inflation with a six month lag, reflecting strong exchange rate pass through to domestic prices.

### B. Composition of Inflation
- Food as principal contributor:
  - Between April 2003 and December 2024, food inflation contributed 53.6 percent to the average headline inflation rate of 14.4 percent.
  - Historical food inflation weights:
    - 63.7 percent up to 2010.
    - 50.7 percent until the rebasing of 2025.
    - 28.0 percent after the rebasing in 2025.
  - Contribution in 2025: food contributed 24.5 percent of the 23.3 percent headline inflation in 2025—about half the historical average contribution.

- CPI rebasing in 2025:
  - Resulted in updated household consumption patterns and significant changes to the composition and weights of the inflation basket.
  - Weight of food declined sharply from over 50 percent prior to the rebasing to about 28 percent.
  - Weights of non-food components such as housing, transport, and other services increased.
  - The rebasing had a mechanical effect on measured inflation, contributing to a downward shift in headline inflation in 2025 and lower measured food inflation; it complicates comparisons with historical inflation outcomes.

- Imported vs domestic food dynamics:
  - Nigeria relies on imported food, which accounts for about 30 percent of consumed food.
  - Domestic food prices often diverge from international food price developments; spikes in international prices do not consistently coincide with upswings in domestic food inflation.
  - Domestic food inflation remains persistently high even after international food prices moderate, influenced by climate events (e.g., severe drought of 2022/23 and widespread flooding in 2024) and fuel-related transport costs (one quarter of retail food prices reflect transport cost).

- Other notable contributors:
  - Large depreciation episodes raised local-currency costs of imported inputs and tradables, feeding into transport, housing-related items (including energy and utilities), and other market-based services.
  - The recent inflation surge included material increases in contributions from transport and housing, consistent with higher energy and logistics costs and broader pricing spillovers.

### C. Persistence
- Role of persistence:
  - Inflation persistence is measured by an AR(1) persistence index obtained from a 48-month rolling window; it captures how past inflation shapes current and future price formation.
- Historical and comparative context:
  - Pre-unification persistence prior to the 2023 exchange rate reforms hovered near 1.0 following the June 2016 depreciation, indicating an entrenched, near-unit-root inflation process.
  - Cross-country benchmarks:
    - WAEMU persistence index historically averaged 0.2, rising temporarily to 0.55 at the height of the 2021–22 global commodity price shock.
    - CEMAC implied persistence coefficient from a hybrid Phillips curve over 2001–2022 ranges between 0.87 and 0.92, with a baseline of 0.868.
- Recent evolution:
  - Since the exchange rate unification of June 2023, inflation persistence in Nigeria has edged downwards.
  - Persistence declined from about 1.0 to 0.1 by early 2026.
- Drivers of the decline:
  - Primary driver: exchange rate unification, which re-linked exchange rate and price formation.
  - Complementary factors: global moderation in food and energy commodity prices from their 2022 peaks.
  - The 2025 CPI rebasing contributed mechanically to a downward shift in the measured inflation intercept and could reduce the estimated AR(1) persistence coefficient, but the decline in persistence began in mid-2023—before the rebasing.

- Policy implication:
  - The decline in persistence suggests a nascent shift in the inflation process with shocks becoming less entrenched, making price dynamics more responsive to market adjustments and monetary policy tightening.
  - This provides an opportunity to transition toward a more forward-looking, inflation-targeting framework.

### D. Diffusion
- Diffusion measures the breadth of inflationary pressures as the share of CPI items exceeding specified inflation thresholds.
- Recent patterns:
  - Since end-2024, diffusion measures have eased.
  - More than half of CPI components fell below the 20 and 25 percent inflation thresholds.
  - Nevertheless, a substantial share—still more than half—remains above 15 percent inflation, indicating that price pressures, though moderating, remain broad-based.
- Implication:
  - Persistence and diffusion indicators together suggest securing durable disinflation will require sustained policy credibility and continued macroeconomic discipline.

### E. Expectations
- CBN inflation expectations survey (recently restarted) shows a downward trend from December 2024.
- Survey outcomes:
  - Share expecting higher inflation declined to 28 percent at end 2025, from an average of 54 percent in the second half of 2024.
  - Share expecting lower inflation has remained broadly stable.
  - Share "not sure" increased from 27 percent in the second half of 2024 to 42 percent in December 2025.
- Interpretation:
  - These developments suggest high inflation is no longer universally seen as the norm, reducing the risk that shocks become self-perpetuating and indicating greater sensitivity to policy credibility.
  - Caution: these survey responses could reflect backward-looking expectations; the CBN has not set an official inflation target.

### F. Conclusion
- Reforms have made inflation in Nigeria less persistent and more responsive to monetary policy action.
- Contributing factors: exchange rate unification, improved market mechanisms, and a tighter monetary stance.
- Outlook and policy requirements:
  - Positive trends provide an opportunity for monetary policy to play a greater role in anchoring expectations and promoting price stability.
  - Achieving durable disinflation will require:
    - Sustained macroeconomic discipline.
    - Enhanced policy credibility.
    - Strong coordination between fiscal and monetary authorities.
    - Maintaining a credible and tight monetary policy stance, supported by clear communication, to safeguard disinflation gains and support the transition toward a forward-looking, inflation-targeting framework.

*Source: IMF staff chapter “Inflation in Nigeria: A Descriptive Analysis of Recent Developments,” May 7, 2026.*

### 2.      In June 2016, faced with intensifying capital outflows and reserve depletion, the CBN

### 1ngaea2026002 - 2.      In June 2016, faced with intensifying capital outflows and reserve depletion, the CBN

### Exchange rate regime history and market outcomes
- From 2008 to 2014 the naira operated de facto as other managed arrangement, a regime close to a conventional peg with low volatility and sustained intervention.
- The 2014 oil price shock triggered devaluations in 2014-15 and an announced shift in 2016 toward a more flexible framework; in practice the framework continued to operate with multiple windows and administrative controls while the parallel rate adjusted more freely, operating de facto as a stabilized arrangement.
- The parallel market premium:
  - averaged around 30 percent over the period before unification;
  - surged above 70 percent during acute stress episodes (2016-17 and 2020-22), signaling sustained misalignment and foreign exchange scarcity.
- Foreign reserves fall noted in the narrative: from US$40.7 billion in January 2014 to US$26.6 billion in May 2016.
- The multi-window framework components (as described):
  - official/interbank window (CBN intervened and set reference rate),
  - Investors and Exporters (I&E) window (introduced April 2017; more market-determined),
  - Secondary Market Intervention Sales (SMIS) window (allocated FX to prioritized sectors),
  - Bureau de Change (BDC) window (retail transactions; administrative limits and periodic suspensions).

### June 2023 unification and transition to floating
- On June 16, 2023 the CBN unified exchange rate windows, allowing the official rate to adjust toward market-clearing levels.
- Consequences of unification:
  - parallel market premium compressed to an average of about 9 percent after unification;
  - exchange rate adjusted continuously, with volatility rising to around 11.6 percent (transition from infrequent stepwise adjustments to more frequent two-sided fluctuations under a market-determined regime);
  - part of higher volatility reflects transition effects: market adaptation and settlement of overdue FX obligations.
- Pre-unification official rate behavior:
  - staircase pattern with discrete devaluations (examples: November 2014, November 2015, June 2016, and March 2020),
  - 12-month rolling standard deviation averaging about 2.7 percent.

### Monetary policy recalibration and market rates
- Monetary policy response post-unification:
  - Monetary Policy Rate (MPR) increased sharply to 27.5 percent;
  - Money market rates adjusted visibly upward; interbank call rate shows considerably lower volatility than earlier and remains largely within the standing facility corridor, though since August 2025 it has tracked the SDF more closely than MPR, reflecting persistent excess liquidity;
  - Treasury bills and lending rates moved to significantly higher levels;
  - Savings deposit rates rose only modestly, remaining in the 3–7 percent range despite sharp increases in MPR and the deposit facility rate.
- Operational recommendation (from text): aligning liquidity management operations with the policy stance and streamlining the very high cash reserve ratio (CRR), currently at 45 percent, to improve transmission and allow gradual reduction in CRR as inflation declines.

### Interest rate pass-through: patterns and magnitudes
- High-level characterization:
  - Policy-rate transmission improved since exchange rate unification but remains uneven: strongest in wholesale money markets and weakest for retail deposit rates.
  - The interbank call rate exhibits near one-for-one contemporaneous pass-through slope ≈  .97 , indicating short-term wholesale funding conditions closely track policy decisions (note: episodic liquidity spikes inflate the simple correlation).
  - The 91-day Treasury bill yield responds more moderately slope ≈  .   .
  - The average deposit rate displays weak responsiveness slope ≈  .   .
- Regime-dependent transmission (contemporaneous pass-through coefficient γ₀: same-month response to a 100-basis point change in the MPR):
  - Other managed arrangement (2007–2016): interbank and T-bill rates moved by about 32 and 90 basis points, respectively, per 100 basis point change in the policy rate (equilibrium β ≈  .  );
  - Stabilized arrangement (2016–2023): transmission broke down; interbank rate moved in the opposite direction due to CBN liquidity injections defending the peg, T-bill and lending rates were unresponsive γ₀ ≈   . ;
  - Post-unification: contemporaneous pass-through surged well above unity for all wholesale rates; deposit rates remained muted across regimes.
- Asymmetric “rockets-and-feathers” pattern:
  - Tightening: a 100 basis-point MPR hike raises T-bill and lending rates by roughly 175–180 basis points on impact.
  - Easing: a comparable cut lowers them by only about 25–30 basis points.
  - Interbank rate responds symmetrically (around 0.6 in both directions); deposit rates show little response either way (around 0.12), both not significant in some specifications.
- Implication: pass-through operates more through changes in rates than through their levels; strengthening operational framework and liquidity alignment is critical to ensure MPR anchors interbank and transmits to lending and deposit rates.

### Conditional exchange rate pass-through and inflation dynamics
- Under the floating regime, exchange rate movements are an active channel of inflation dynamics; the inflationary consequences depend on the nature of the underlying exchange rate shock, so a conditional approach is essential.
- Methodology:
  - Adopted the conditional framework of Forbes et al. (2018) and incorporated pre-identified oil market shocks from Baumeister and Hamilton (2019) into a Bayesian VAR.
  - Baseline specification: six variables in Cholesky ordering — (1) oil supply shock, (2) global growth oil-demand shock, (3) the federal funds rate, (4) Nigerian CPI inflation, (5) the official exchange rate, and (6) the monetary policy rate.
  - Exchange rate pass-through (ERPT) defined as ratio between cumulative response of CPI and cumulative response of the exchange rate to a given structural shock at each horizon (as in Forbes et al., 2018).
  - Estimation uses bilateral nominal naira/USD exchange rate.
- Baseline findings (shock-dependent outcomes):
  - Global oil supply disruption shocks:
    - Trigger a naira appreciation on impact (cumulative exchange rate response reaching approximately − .  percentage points after six months before gradually moderating — as presented in source).
    - Despite appreciation, CPI increases due to dominant cost-push effects from higher oil prices: CPI rises by approximately 0.65 percentage points cumulatively over 24 months.
    - The implied conditional ERPT is reported as − . 9 at h =    (Figure 8, red line) in the source, indicating negative conditional pass-through in this case — i.e., oil supply disruptions generate inflation in Nigeria despite associated appreciation because direct cost channels dominate.

### Policy implications emphasized in the text
- Strengthen operational framework so MPR more effectively anchors the interbank rate and transmits to lending and deposit rates.
- Align liquidity management operations with the policy stance to reinforce transmission.
- Streamline the very high CRR (currently at 45 percent) to support improved transmission; as inflation declines, the nominal MPR would be expected to fall, easing the cost of liquidity absorption and allowing gradual CRR reduction.
- Build confidence in the domestic currency (via lower and more stable inflation) to ease dollarization pressures, increase demand for naira, reduce structural excess liquidity, and support lower CRR.

*Prepared by Cecilia Melo Fernandes (MCM) and Chris Stumphius (AFR). Joanna Delcambre (AFR) provided editorial support.*

### 16.      Global growth‑ demand driven by oil price shocks also lead to an appreciation of the

### 16.      Global growth‑ demand driven by oil price shocks also lead to an appreciation of the naira but it has only a limited impact on domestic consumer prices.

### Impulse-response evidence: oil price shocks and the naira
- A positive global growth shock raises oil prices by boosting global crude demand and precautionary demand, independent of supply conditions.
- Higher oil prices under a global growth/oil demand shock raise export revenues and lead to an appreciation of the naira, with the cumulative appreciation "at about 1 percentage point after 24 months".
- Despite the appreciation, CPI remains statistically indistinguishable from zero with wide credible bands at all horizons (Figure 7b, second column).
- The near-zero exchange-rate pass-through (ERPT) is +0.02 at h = 12, indicating the appreciation fails to translate into lower consumer prices.

### Contrast: oil supply disruption versus demand-driven oil boom
- Under an oil supply disruption:
  - Cost-push channel operates through both price and quantity dimensions: higher fuel prices coincide with physical scarcity.
  - Physical scarcity elevates transport costs, creates input bottlenecks, and amplifies inflationary pressures across production stages.
  - These forces can generate inflationary effects even when the naira appreciates.
- Under a global demand‑oil boom:
  - Oil prices rise but supply remains available at those prices; cost pressures are purely price-mediated and lack the scarcity amplifier.
  - Pass-through to headline inflation is more contained relative to the supply-disruption scenario.

### External financial shocks (U.S. monetary policy)
- A contractionary US monetary policy shock raises Nigerian CPI by about 0.2 percentage points on impact, increasing to roughly 0.6 percentage points after 24 months.
- The naira depreciates cumulatively by about 2 percentage points at the 12-month horizon, consistent with capital outflows triggered by higher US rates (Figure 7a, third column).
- The capital-flow mechanism generates a conditional pass-through ratio of approximately 0.3 at the 12-month horizon (Figure 8, green line).
- Over time the pass-through ratio declines as the exchange rate continues to depreciate faster than consumer prices respond; the Fed-driven depreciation overshoots domestic price adjustment.
- Factors dampening longer-run pass-through:
  - Importers may treat US tightening as transitory.
  - Administered prices — regulated fuel and electricity tariffs — shield a significant share of the CPI basket from exchange rate movements for much of the sample.
- The June 2023 subsidy removal and exchange rate unification represent a structural break that likely strengthened the transmission channel going forward; full-sample estimates likely understate post-reform pass-through.

### Fiscal extension: monetization and inflation
- The fiscal shock is identified as a one-standard-deviation innovation to the monthly change in net claims on central government ΔNCCG, which equals 2.2 trillion NGN over the 2007–2025 estimation sample.
- Context for ΔNCCG distribution:
  - Median monthly change: near zero (0.04 trillion NGN).
  - Maximum observation: 18.9 trillion NGN — corresponding to the peak of CBN Ways and Means financing in 2022.
  - Mean: 0.12 trillion NGN.
- A one-standard-deviation shock (2.2 trillion NGN) produces:
  - A front-loaded rise in CPI that builds gradually, reaching about 0.17 percentage points at 12 months and 0.24 percentage points after 24 months.
- Exchange rate response to the fiscal shock:
  - Naira depreciates sharply on impact, peaking at approximately 1.5 percentage points within the first three months, before reversing and thereafter oscillating around zero with wide credible bands.
  - Pattern consistent with a confidence channel operating through monetization: an expansion in Ways and Means financing signals monetary accommodation and triggers an initial depreciation followed by mean reversion.
- The inflationary effect therefore operates primarily through the domestic money supply rather than through a sustained exchange rate depreciation.
- Fiscal contribution to CPI variance remains modest at 3.3–3.5%.

### Regime change and conditional pass-through
- Exchange rate pass-through strengthened following exchange rate unification (regime change).
- Post-unification:
  - A one-standard-deviation exchange rate shock raises CPI by about 0.27 percentage points within 12 months.
  - Estimates are more tightly identified at short horizons, though the shorter post-reform sample (ending at 12 months) limits inference about longer-run dynamics.
- Pre-unification:
  - Using the official exchange rate yields a muted, imprecise CPI response close to zero with credible bands overlapping zero across most horizons.
  - Using the parallel market rate for the pre-unification period yields a larger point estimate, with cumulative CPI response reaching about 0.65 percentage points after 24 months, though credible bands widen substantially at longer horizons.

### Methodology and identification (summary of NIW-BVAR setup)
- Baseline six-variable NIW-BVAR estimated over 2007M1–2025M9.
- Estimation details:
  - Six lags.
  - Each equation contains 37 free parameters (43 in the seven-variable extension).
  - Estimated on 225 observations.
- Cholesky ordering in the baseline six-variable specification: (1) oil supply shock, (2) oil demand shock, (3) the federal funds rate, (4) Nigerian CPI inflation, (5) the official exchange rate, and (6) the monetary policy rate.
- In the seven-variable extension the monthly change in net claims on the central government (ΔNCCG) is inserted between the exchange rate and the MPR in the Cholesky ordering.
- Bayesian shrinkage (Normal-Inverse-Wishart prior) used to obtain stable and precise impulse responses given system size relative to sample.

### Conclusions and policy implications
- Transition to a market-determined exchange rate regime has:
  - Strengthened interest rate pass-through and altered inflation dynamics associated with exchange rate movements.
  - Increased conditionality of exchange rate pass-through on shock composition: oil supply disruptions can generate inflation despite currency appreciation due to cost-push and scarcity effects; demand-driven oil price increases produce limited inflationary responses due to available supply and offsetting exchange rate appreciation.
  - External financial tightening transmits inflation via conventional capital flow and import price channels.
- Policy implications emphasized:
  - Exchange rate pass-through is not a structural constant but depends on shock composition, regime characteristics, and policy credibility.
  - Coherent liquidity management and a consistent monetary policy framework are important as Nigeria moves toward a more fully functioning inflation targeting regime.

*Source: IMF Staff.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1ngaea2026002.pdf_