The World Bank has raised concerns over the effectiveness of the Central Bank of Nigeria’s (CBN) monetary policy tightening in controlling the country’s inflation. In its latest report titled “Global Economic Prospects,” the bank highlighted the potential limitations of this strategy in achieving the desired economic stability.
The report maintains Nigeria’s economic growth projection at 3.3% for 2024, consistent with its earlier forecasts. It anticipates a slight improvement in 2025, with a growth rate of 3.5%. This optimistic outlook is based on the current administration’s reforms in the petroleum and foreign exchange sectors, which are expected to gradually enhance economic conditions. Despite these positive signs, the World Bank cautioned that the CBN’s aggressive interest rate hikes might not effectively curb inflation, posing a significant risk to the economic outlook.
Since the beginning of the year, the CBN has raised interest rates by a total of 750 basis points. The report suggests that while these measures are intended to combat inflation, their effectiveness remains uncertain. “Growth in Nigeria is projected to pick up to 3.3% this year and 3.5% in 2025,” the report states. “After the initial shock from macroeconomic reforms, economic conditions are expected to gradually improve, leading to sustained, but still modest, growth in the non-oil economy. The oil sector is also expected to stabilize as production recovers somewhat.”
However, the report underscores significant risks to this growth outlook, notably the potential failure of monetary policy tightening to control inflation.
Economic Reforms and Inflation Dynamics
President Tinubu’s twin reforms—removal of fuel subsidies and unification of the foreign exchange rates—have had a profound impact on the economy. The naira, Nigeria’s currency, depreciated dramatically, ending 2023 at N907/$ and further weakening to around N1,400/$ in 2024, with a peak of about N1,600/$ in February. These changes have contributed to a surge in inflation, reaching its highest level in 28 years, with food inflation hitting 40.53%.
In response, the CBN has implemented a series of aggressive interest rate hikes. Under Governor Yemi Cardoso, the Monetary Policy Committee (MPC) raised the interest rate by 600 basis points from 18.75% to 22.75%, followed by additional hikes, bringing the rate to 26.25%. The CBN also increased the Cash Reserve Ratio (CRR) for banks to 45%, one of the highest globally.
Stakeholder Reactions
The Nigerian business community, including groups like the Centre for the Promotion of Private Enterprise (CPPE), the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA), and the Manufacturers Association of Nigeria (MAN), has criticized these interest rate hikes. They argue that the policy increases the cost of accessing capital, negatively impacting the real economy without effectively addressing inflation.
Despite the CBN’s efforts, inflation has continued to rise. In January, before the monetary policy tightening, the inflation rate was 29.90%. By April 2023, it had increased to 33.69%, suggesting that the interest rate hikes have not had the intended effect on curbing inflation.
As Nigeria navigates these economic challenges, the effectiveness of the CBN’s monetary policies remains a critical issue. The World Bank’s cautious outlook highlights the complexity of the situation and the need for a balanced approach to ensure sustainable economic growth and stability.
