The Chief Executive Officer of Centre for the Promotion of Private Enterprise, Muda Yusuf, has called on the Central Bank of Nigeria to soften its stance on monetary policy warning that further tightening it could have a negative impact on the economy in 2025.
Yusuf, who made the appeal in a document titled, “Nigeria 2024 review and 2025 outlook,” released on Sunday, stated that the current high interest regime foisted by the tighten stance of the Monetary Policy Committee has increased the risk of loan defaults, hence the prospect of higher non-performing loans in the financial sector.
He therefore called for a softening of interest rate in order to support investment growth and job creation in the economy, adding that high interest rate also increases debt service cost for the government.
“High interest rates typically pose significant risks to business sustainability amid numerous headwinds,” he said, cautioning that there is a need to protect the real economy from the adverse consequences of free market principles.
“This is the basis of government intervention in a market economy,” Yusuf said.
Yusuf who praised the resilience of the Nigerian economy on the account of gross domestic product in 2024 despite the intense macroeconomic headwinds, said the GDP grew at 2.98 per cent in the first quarter, 3.19 per cent in the second quarter and 3.46 per cent in the third quarter, predicting that it may close the year at about 3.6 per cent.
“This is at par with IMF forecasts for GDP growth for Sub-Saharan Africa which is 3.6 per cent and better than the global GDP forecast of 3.2 per cent,” he said.
He also warned of the danger of allowing the services sector to dominate sectoral growth performance.
According to Yusuf, “The implication is that sectors with high job creation potential and prospects for economic inclusion are still struggling.”
He insisted that this situation needs to be reversed to fix the current high unemployment and reduce poverty, noting that the huge disparities in the growth of financial services and the rest of the economy are a reflection of the growing decoupling of the financial services sector from the real economy.
“It also exemplifies the failure of the financial intermediation role of the financial services sector in the Nigerian economy. It is a significant dysfunctionality in the economy which deserves the urgent attention of policy makers.
“The current reality is that investing in financial instruments has become much more profitable than investing in the real economy. The risk is also very low. This is not consistent with our economic aspirations as it is a major disincentive to real sector investment,” he noted.
Yusuf said there is a need for appropriate policy measures to correct the huge disparity in the profitability between the real economy and the financial economy, adding that there is also a progressive crowding out of the real economy in the financial markets.
He said while it is worthy of note that the non-oil sector has continued to dominate the economic space with the sector contributing 94.43 per cent of the country’s GDP in Q3 2024, while the oil sector contributed 5.57 per cent, the economy is characterized by what he called a paradox of the oil sector contributing an estimated 90 per cent of foreign exchange earnings while the non-oil sector accounts for about 10 per cent.
He said this is a structural shortcoming in the economy which needed to be addressed as sectors that contribute hugely to GDP have no corresponding contribution to foreign exchange earnings.
He also commended the fact that the non-oil sector’s contribution to revenue had improved markedly in recent times.
“This economic structure reflects the enormous productivity and competitiveness challenges of the non-oil sector of the Nigerian economy,” he said, noting that the policy implication is that more should be done to fix the challenges of productivity and competitiveness of the non-oil sector of the economy.
“Most of these challenges are the structural issues, infrastructural challenges, funding constraints, regulatory issues and the general macroeconomic headwinds,” Yusuf said.
Looking ahead, Yusuf said in 2025, the moderation of foreign exchange volatility will be based on the expectations that there would be a sustained improvement in foreign reserves which is currently in excess of $40 billion dollars; improvement in accretion to reserves on the back of improved inflows from the international money transfer operators and diaspora remittances, as well as improved capacity of the CBN to moderate rate volatility through periodic intervention in the forex market.
Other factors that could help, according to him include that there would be a positive impact of the $2 billion Euro Bond proceeds on reserves; positive impact of the successful domestic dollar bond of $500 million; the successful clearance of legacy forex obligations of about $7 billion by the CBN and the import substitution effect of the Dangote and Port Harcourt Refineries with the consequential easing of demand pressure on the forex market as well as a gradual recovery of the non-oil export sector and implications for forex inflows.
While highlighting the negative impact of inflation on the economy in the passing year, especially the high cost of living and the erosion of the purchasing power of citizens, Yusuf predicted that inflation may moderate slightly on the expected reduction of the volatility of the exchange rate and possible rebound of the naira.
He also said that moderation in energy cost as the geopolitical tension eases as a result of the impact of the Trump presidency could help the easing of inflation in the country.
He said given the current disposition of the Central Bank of Nigeria, monetary conditions may remain tight in 2025.
However, he added that the degree of tightening may decelerate in 2025 given the current high levels of MPR and CRR.
“The space for further tightening has become limited,” he said.
Yusuf also called on the government to expedite action to boost capitalization of the development finance institutions – BOI, BOA, NEXIM to deepen development finance interventions.
