There seems to be a serious disparity between the intent of the Monetary Policy Committee of the Central Bank of Nigeria’s decision to continually hike interest rate to drive down inflation and the resultant situation. FESTUS OKOROMADU, in this report reviews the economic implications in recent times.
The Monetary Policy Committee of the Central Bank of Nigeria last week concluded its final meeting of 2024 with a modest yet strategic 25 basis points hike in the Monetary Policy Rate, bringing it to a historic high of 27.50 percent leaving all monetary policy parameters unchanged.
This measured move reflects a shift to a dovish stance as the MPC seeks to balance inflation control with the economic realities of 2025.
While analysing the committee’s decision, the Chief Economist and Partner of SPMProfessionals, Paul Alaje, said the hike in MPR will not bring down inflation.
“Mark my word, without stability in exchange rate, forget controlling inflation”, he told our correspondent in a telephone conversation.
On his part, Chief Executive Officer, Financial Derivatives Limited, Bismarck Rewane, noted that the MPC hike in the MPR in response to inflationary pressures.
“The CBN implemented tighter monetary policies, raising the monetary policy rate by 875bps (27.5% p.a as of November 2024) and maintaining the cash reserve ratio at 50 percent in response to inflationary pressure,” he said.
He however, emphasised that, “these actions have yet to fully stabilize inflation or restore consumer purchasing power.”
He added that, “The persistent gap between rising inflation and stagnant wages will continue, placing significant pressure on consumers. With lower consumption, businesses may face decreased sales, leading to potential reductions in production and job losses, which could exacerbate the unemployment rate. This, in turn, would create a negative multiplier effect, limiting investment opportunities and weakening Nigeria’s economic growth prospects.”
“So far in 2024, higher inflation and low-income levels have pushed an additional 14 million Nigerians below the poverty line of $2.15 daily”
Responding to the MPC’s decision, the Chief Executive of Cowry Assets Management Limited, Johnson Chukwu, said the decision is a reflection of the committee’s “intent to curb aggregate demand without significantly dampening economic output; reinforce its credibility in maintaining price stability, narrow the negative real interest rate gap to encourage domestic savings and restore investor confidence; and taper economic and financial conditions to manage systemic liquidity effectively.”
He added that the MPC is likely to maintain a tightening stance in early 2025, particularly if inflationary pressures persist.
Stressing that as inflation shows signs of moderation, the committee may adopt a more accommodative approach to stimulate growth and improve real income levels.
“Collaborative efforts between fiscal and monetary authorities remain critical to achieving synchronised objectives of economic stability and sustainable development. The current approach signals cautious optimism, as the CBN navigates the complexities of inflation control, economic growth, and monetary transmission in the Nigerian economy.”
This is even as all members of the MPC affirmed in their communiqué that their decision is made to tackle the unrelenting inflationary pressures the country is facing.
This is even as the Centre for the Promotion of Private Enterprise shares a different view, professing that the manufacturing and agriculture sectors need fiscal support instead of further monetary tightening.
The Centre in a statement signed by the Executive Director, Muda Yussuf, criticised the MPC for maintaining its tightening stance despite evidence of declining growth in critical sectors of the economy.
“It is troubling that despite the declining growth performance of many critical sectors of the economy as evidenced in the third quarter GDP report, the MPC still continued its tightening stance.
“The GDP sectoral performance report also revealed a glaring disconnect between the financial services sector and the real economy.
“The financial services sector recorded a growth of 32 percent, while agriculture and manufacturing grew by 1.14 percent and 0.92 percent. This hawkish disposition deepens the distortions.
“While strategic economic sectors such as agriculture and manufacturing and real estate recorded declines in the third quarter. Air transport and textile remained in recession. These sectors need monetary and fiscal support not a further tightening of monetary conditions,” he stated.
Meanwhile, prior to the MPC’s meeting last week, the latest report by the National Bureau of Statistics shows that Nigeria’s headline inflation surged to a four-month peak of 33.88 percent in October, up from 32.70 percent in September.
This marked the second consecutive monthly increase since August driven by escalating food prices, higher energy costs, and persistent supply chain disruptions.
Just as many financial experts agree that the ongoing volatility in the foreign exchange market exacerbated inflationary trends, despite measures such as zero-duty import policies and aggressive monetary tightening earlier in the year.
According to the NBS report, food inflation rose sharply to 39.2 percent in October from 37.8 percent in September, reflecting the impact of elevated transportation and production costs. Core inflation, excluding volatile food and energy prices, hit an all-time high of 28.4 percent, up from 27.4 percent.
Month-on-month, headline inflation climbed by 2.64 percent, while food and core inflation increased by 2.94 percent and 2.14 percent, respectively, underscoring the pervasive nature of price pressures.
Higher inflation pushes 14 million Nigerians below the poverty line
Unfortunately, reports from global institutional bodies tend to show nullity of the MPC’s interest rate hike policy as a tool of curbing inflation. More so, when one views the policy impact on the generality of the economy and the citizens.
Such an instance is evidenced in the World Bank’s “Macro Poverty Outlook: Country-by-Country Analysis and Projections for the Developing World” report, which revealed that over 14 million Nigerians have slipped below the globally accepted poverty line this year.
The report stated that Nigeria’s poverty level has escalated to 47 percent in 2024 from 40.1 percent in 2018, expressly stating that, “So far in 2024, higher inflation and low-income levels have pushed an additional 14 million Nigerians below the poverty line of $2.15 daily.”
It added that, “The economic strain is largely driven by the widening gap between inflation and wage growth, which continues to erode household purchasing power and limit access to basic goods and services. Inflation is currently 33.88%, while the minimum wage has grown 133 percent.
“Despite efforts to alleviate the situation, including cash transfer programs targeting 15 million households, the poverty rate remains stubbornly high.
Though beneficial in the short term, these measures fail to address the deeper structural issues that have hindered long-term economic growth, such as low productivity, high unemployment, and weak wage growth. Without more robust economic reforms, the World Bank projects that the poverty rate could rise to 52 percent by 2026.”
Economic strain drives 65% of Nigerian households below nutritional standards
To further complicate the situation, there are indications that food insecurity in Nigeria has worsened, as 62.4 percent of households report insufficient food in 2023.
This marks a stark increase compared to the pre-COVID-19 levels, when 36.9 percent of households experienced food insecurity. The rise coincides with an increase in inflation caused by structural reforms and macroeconomic pressures.
Evidently, the rising food prices, driven by high inflation at 33.88 percent in October 2024, along with subsidy cuts and a 72 percent drop in the value of the naira, have made it more difficult for families to afford essential items.
According to the United Nations, households are adopting coping strategies such as eating less (60.5 percent of the population), limiting food variety (63.8 percent of the population), and relying on borrowings to eat (20.8 percent of the population). Geographic and demographic disparities are evident. Southern zones reported higher food insecurity, with over 60 percent of households in the South-South region skipping meals, compared to 34 percent in North Central.
Female-headed households were disproportionately affected, with 72.2 percent unable to afford nutritious meals compared to 64 percent of male-headed households, a gender gap of 8.2 percentage points.
For banking consumers, these economic strains translate to reduced savings as households prioritize consumption, shrinking deposit growth for banks.
Simultaneously, the rising demand for informal and formal credit to meet basic needs could expand retail loan portfolios but heighten default risks if income levels remain stagnant.
Reported GDP growth in Q3 versus reality
“The impact of unchecked inflation would be far more harmful than the effects of higher interest rates”
One of the most exciting reports to economists in recent times is the NBS report on the nation’s gross domestic product which indicated that during the third quarter (Q3 ’24), Nigeria’s economy expanded by 3.46 percent growth, 0.2 percent higher than 2.54 percent in Q3’23. The growth primarily stemmed from the services sector, which saw an expansion of 5.19 percent, making it the largest contributor to the GDP.
Subsectors like telecommunications, financial services, and trade played a key role in services.
Though recovering, the oil sector grew by 5.17% as oil production slightly increased by 4.72% to 1.33mbpd in Q3 ’24 from 1.27mbpd in Q2’24.
However, economic growth has not been felt equally across all sectors, nor has it significantly alleviated financial pressures. High inflation, particularly in food prices, continues to undermine the benefits of growth.
Food inflation reached a staggering 39.16 percent in Q3’24 as everyday goods like rice, oil, and grains are becoming increasingly unaffordable for the average Nigerian.
While the economy is growing in aggregate, the rising cost of living means that many Nigerians feel more financially strained.
Towing the line of Yussuf, Rewane while reviewing the GDP performance, noted that the agricultural and manufacturing sectors which are crucial for job creation and affordable goods, have shown limited growth.
“Agriculture grew by only 1.14 percent, while manufacturing saw a marginal increase of 0.92 percent. These slow growth rates in critical sectors result in insufficient local production to meet domestic demand, pushing Nigerians to rely more on imports,” he stated.
He added that the depreciation of the naira has further compounded the situation.
“As the local currency loses value against the dollar, the cost of imports increases, making goods and services more expensive. This, combined with Nigeria’s reliance on imports due to underdeveloped local manufacturing capacity, creates a cyclical problem where inflation feeds into itself, making the cost of living more expensive for Nigerian consumers,” he said.
Nigeria’s first Professor of Capital Market, Uche Uwaleke, indicated that the move might signal an imminent pause in the CBN’s aggressive monetary tightening cycle.
Uwaleke noted that the marginal increase aligns with analysts’ expectations, suggesting a potential shift in the CBN’s strategy.
“The marginal rate increase is a signal that the CBN may completely pause or apply the brake on interest rate hikes starting from the first quarter of next year,” he explained.
The professor emphasized the necessity of a pause, citing the rising cost of funds and its adverse impact on credit access, particularly for small businesses.
“This needs to happen so that small businesses can breathe,” he remarked.
Despite the CBN’s sustained tightening measures, headline inflation remains stubbornly high, reversing recent gains and rising further.
Uwaleke observed that the benefits of the rate hikes have been most apparent in the foreign exchange market, where increased foreign portfolio inflows have contributed to exchange rate stability in the official window.
However, the broader economic picture remains concerning. The Q3 2024 GDP report released by the National Bureau of Statistics showed weak performance in the agriculture and manufacturing sectors, a development Uwaleke attributed to rising interest and exchange rates.
He stressed the need for coordinated efforts between monetary and fiscal authorities to navigate the country’s macroeconomic challenges effectively.
“The current macroeconomic challenges make it imperative for a proper synergy between monetary and fiscal policies,” he advised.
Managing Director of Arthur Steven Asset Management Limited and former President of the Chartered Institute of Stockbrokers, Olatunde Amolegbe, also shared his views on the CBN’s decision to raise the Monetary Policy Rate by 25 basis points, moving it from 27.25 per cent to 27.50 per cent.
Amolegbe noted that the rate hike was widely anticipated, particularly given the National Bureau of Statistics report showing inflation had increased by over 100 basis points in the previous month.
“The truth is that this was somewhat expected,” Amolegbe stated, acknowledging that many analysts had predicted this adjustment, with some even anticipating a higher increase due to ongoing price instability across various sectors of the economy.
He further pointed out that the government’s fiscal and structural measures, aimed at curbing inflation, have yet to yield immediate results.
“These measures typically take time to have the desired impact,” he said, adding that as a result, monetary policy has remained the primary tool available to the CBN in its efforts to stabilize the economy.
“This leaves us with monetary policy as the only effective tool to prevent the economy from spiraling out of control,” he explained.
However, Amolegbe also warned of the potential negative consequences of the rate hike on businesses and consumers.
“The likely impact of this move will be a further increase in financing costs for businesses,” he stated.
These higher costs are expected to be passed on to consumers, potentially raising prices on goods and services and putting additional strain on household budgets.
Amolegbe concluded by emphasizing the delicate balance the CBN faces in managing inflation and ensuring that the economy does not overheat, while acknowledging the challenges that persist in the broader economic landscape.
Managing Director of Highcap Securities Limited, David Adonri, also weighed in on the Central Bank of Nigeria’s continued use of interest rate hikes as a tool to manage inflation, noting that while effective in the short term, it remains insufficient in addressing the underlying economic issues.
Adonri explained that interest rate adjustments are a critical component of monetary policy designed to curb inflation until more sustainable fiscal measures can be implemented to address the structural causes of economic imbalance.
“Interest rates are a potent tool for managing inflation in the short term,” Adonri stated.
“However, their effectiveness is often limited when coupled with expansionary fiscal policies,” he added.
He further emphasized that the ongoing fiscal expansion, alongside factors such as insecurity and currency depreciation, continues to fuel inflation.
These persistent challenges leave the CBN’s Monetary Policy Committee with few options but to maintain its contractionary monetary stance.
“As long as fiscal policies remain expansionary and the factors driving inflation persist, the MPC will have no choice but to continue raising interest rates,” he explained.
Adonri also cautioned that allowing inflation to spiral out of control would have devastating consequences for both consumers and producers.
“The impact of unchecked inflation would be far more harmful than the effects of higher interest rates,” he warned, underlining the importance of the MPC’s approach in preventing further economic instability.
Despite the negative effects on certain sectors of the economy, Adonri acknowledged that the interest rate hikes provide a silver lining for investors in debt instruments.
“The bonanza for investors in debt assets will continue as the rates rise,” he noted, as higher interest rates typically make fixed-income investments more attractive.
Nigeria’s food insecurity to worsen in 2025
The United Nations projects Nigeria’s food insecurity crisis to worsen by 2025.
An alarming 33.1 million people are expected to face severe hunger by August 2025—an increase of 26.8 percent from 2024’s figure of 26.1 million.
According to the UN report, this escalation is largely driven by high inflation, unfavourable economic policies, climate-related disruptions, and ongoing security challenges that severely impact food production and distribution.
The report stated that agricultural productivity has been severely hampered by insecurity in the northern regions, where frequent attacks by armed groups have displaced farmers and disrupted planting activities.
It further stated that, severe flooding in 2024 submerged 1.6 million hectares of farmland, resulting in a production loss of 1.1 million tonnes across essential crops like maize, sorghum, and rice.
“These disruptions have constrained food supply, increasing prices and making staple foods unaffordable. Nigeria’s food inflation rose to 39.16% in October 2024,” it stated.
With soaring food prices and reduced household incomes, many Nigerians are forced to cut down on food consumption, leading to higher malnutrition rates.
Vulnerable groups, particularly children and pregnant women, are at increased risk of severe acute malnutrition, which could have long-term effects on public health and labour productivity.
Economic hardship, food inflation, and supply shortages will likely deepen poverty, exacerbate social inequality, and fuel social unrest.
High interest rates and inflation
According to Rewane, analysis of financial institutions performance in the first half of 2024 shows that Nigerian banks demonstrated resilience despite facing significant economic challenges, including a steep inflation rate of 323.88 percent in November, currency instability, and heightened security concerns.
“Non-performing loan (NPL) ratios showed minimal fluctuation, with the ten leading Nigerian banks reporting an average NPL ratio of 7.49 percent in half year 2024 (HY ’24), a slight improvement from 7.53 percent in full year (FY’2023).
“The outcome suggests that these banks managed to effectively control credit risk and maintain asset quality despite unfavourable economic conditions,” he stated.
Fitch Ratings predicted a rise in NPL ratios across the banking sector for the remainder of 2024, attributing this to high interest rates and inflationary pressures.
With loans accounting for just 35 percent of banking sector assets at the end of 2023, the increase in NPLs reflects the strain on borrowers from elevated borrowing costs and reduced disposable income.
For consumers, the direct impact of the monetary tightening has been significant. The spike in interest rates led to a 53.9 percent drop in personal loans from ₦7.52 trillion in Q1 2024 to ₦3.47 trillion in Q2 2024. This sharp decline indicates that many consumers opted to repay existing loans rather than take on new debt due to prohibitively high borrowing costs.
The surge in interest rates has pushed lending rates to above 30 percent, discouraging consumer credit uptake. Concurrently, small businesses faced liquidity pressures, shifting towards short-term retail loans, which increased to ₦1.26 trillion from ₦72 billion, reflecting the need for working capital to manage rising operational costs.
Additionally, the CBN introduced stricter regulations, such as higher capital requirements for banks to be enforced by Q1’26. These measures, aimed at shoring up the financial sector’s resilience, are expected to compress profit margins but are unlikely to cause breaches in capital adequacy ratios.
