The World Bank has stated that monetary policy tightening by the Central Bank of Nigeria (CBN) may not rein in inflation as anticipated by analysts.
In its recent report titled, “Global Economic Prospects” on the outlook for the rest of 2024 and 2025, the World Bank pegged Nigeria’s economic growth rate at 3.3 per cent in 2024 same as its projection at the beginning of the year.
Furthermore, the bank projected Nigeria’s GDP to grow at 3.5 per cent in 2025.
It explained that growth will pick up from the 2.9 per cent recorded in 2023 due to the effect of the current administration’s reforms in the petroleum and forex exchange sector. However, the report noted that the failure of monetary policy tightening by the Central Bank of Nigeria (CBN) remains a risk to the outlook.
The Central Bank of Nigeria (CBN) since this year has increased interest rates by a combined 750 basis points.
The report stated, “Growth in Nigeria is projected to pick up to 3.3 per cent this year and 3.5 per cent in 2025. After the macroeconomic reforms’ initial shock, economic conditions are expected to gradually improve, resulting in sustained, but still-modest growth in the non-oil economy. In addition, the oil sector is expected to stabilise as production somewhat recovers.
“Risks to Nigeria’s growth outlook are substantial, including the possibility that the tightening of monetary policy stops short of reining in inflation.”
Following the removal of fuel subsidy and subsequent unification of the foreign exchange- President Tinubu’s twin reforms. The naira depreciated to close 2023 at N907/$- a decline of almost 100 per cent. In 2024, the naira has further weakened to around N1400/$ reaching a peak of about N1,600/$ around February.
The ripple effect of the twin reforms has pushed inflation to the highest in 28 years and food inflation at 40.53 per cent.
In response to these, the Central Bank of Nigeria (CBN) engaged in a bullish monetary policy tightening spree. In his first Monetary Policy Committee (MPC) meeting on assumption into office, Governor Yemi Cardoso increased the interest rate by 600 basis points from 18.75 per cent to 22.75 per cent.
This was followed by another 200 basis points hike and a further 150 bps increase to reach 26.25 per cent. The apex bank also increased the Cash Reserve Ratio (CRR) of banks to 45 per cent- one of the highest in the world.
Members of the Nigerian business community (CPPE, NACCIMA, MAN) have criticised the interest rate hike by the CBN stating it is ineffective in tackling inflation across the country and hurts the real economy as it increases the cost of accessing capital.
Although, the CBN stated that the hike in MPR was necessitated to tame inflation, that has not materialised.
The inflation rate in January before the MPR hike was 29.90 per cent, this has increased to 33.69 per cent in April 2023.
