As Nigeria’s economic challenges mount in 2024, it is becoming increasingly clear that the Central Bank of Nigeria’s (CBN) reliance on aggressive monetary tightening is failing to stem the tide of inflation. Raising the Monetary Policy Rate (MPR) by 850 basis points this year to a striking 27.25 percent was meant to signal to resolve in the fight against rising prices. Yet, despite these dramatic measures, inflation continues its upward trajectory, prompting serious questions about the sustainability of this approach.
Inflation eased briefly in mid-2024, but any optimism was short-lived. The cost of living—particularly for essentials like food and fuel—remains prohibitively high. Many Nigerians are now asking whether the CBN’s strategy is merely exacerbating an already dire situation. The issue at hand is not whether interest rate hikes have a place in managing inflation but whether, in Nigeria’s case, they are being overused at the expense of more nuanced, structural interventions.
Monetary policy plays a critical role in managing inflation but cannot, on its own, address the underlying causes of Nigeria’s price pressures. The CBN’s strategy of tightening credit has led to increased borrowing costs for businesses and consumers alike. While this may theoretically curb spending, in a country where much of the population is already economically stretched, the policy has had severe unintended consequences.
A recent survey by the CBN highlights these challenges: 98 percent of businesses reported significant obstacles to growth, including insecurity, high interest rates, and opaque regulatory conditions. For small and medium-sized enterprises (SMEs)—the backbone of Nigeria’s economy—higher borrowing costs stifle investment, limiting their ability to expand or even survive. Simultaneously, ordinary Nigerians are grappling with escalating household expenses, deepening the sense of financial precarity.
This approach has thus disproportionately impacted those least able to bear the burden. While the CBN’s intentions are clear, the unintended consequences of suppressing growth in the name of inflation control are hard to ignore.
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The persistence of inflation despite 12 consecutive MPR hikes underscores a critical point: the root causes of Nigeria’s inflation are largely structural. Flooding, low agricultural productivity, and insecurity—particularly in rural areas—continue to drive up the price of essential goods. Furthermore, the removal of energy subsidies, while necessary for fiscal consolidation, has added additional strain on households and businesses alike.
The CBN’s approach has so far been to treat inflation as a problem of excess demand when in reality, much of the pressure is coming from the supply side. As Abdulbasit Shuaib, a leading financial analyst, has argued, a more comprehensive strategy is needed—one that integrates supply-side reforms with monetary policy adjustments. Investments in agricultural modernisation, infrastructure, and security could help stabilise prices in a more sustainable way than rate hikes alone ever could.
Nigeria’s experience is not unique. Other emerging markets have grappled with inflationary pressures and found ways to mitigate the worst effects through a combination of fiscal and monetary tools. India, for instance, has successfully combined moderate interest rate adjustments with significant investments in agricultural infrastructure, helping to keep inflation manageable. Kenya has expanded social safety nets, directly supporting vulnerable citizens through inflationary periods. Even the United States, with its far more robust economy, has balanced rate hikes with targeted fiscal interventions, including infrastructure spending, to bolster long-term growth.
What these examples demonstrate is that monetary policy, while essential, is only one piece of the puzzle. Nigeria could learn from these countries by adopting a more holistic approach, combining fiscal responsibility, supply-side investments, and targeted social support to alleviate the pressure on businesses and households.
It is clear that Nigeria cannot rely solely on monetary tightening to navigate its inflation crisis. The need for structural reform is pressing. The federal government must work in concert with the CBN to address the systemic issues—such as insecurity, poor infrastructure, and agricultural inefficiencies—that are driving inflation.
This is not to say that interest rate hikes should be abandoned altogether. However, they must be complemented by more substantive economic policies. Countercyclical fiscal measures, such as targeted infrastructure investment, could ease supply constraints and reduce inflationary pressures. Meanwhile, reforms in agriculture, security, and transport could bring long-term stability to food prices and other essentials.
A significant change in policy is essential to Nigeria’s economic future. The CBN’s interest rate hikes, while well-intentioned, have fallen short of their intended goals. It’s imperative to recognise that inflation is a complex issue with deep-rooted structural causes. To effectively combat it, a multi-faceted approach is needed. This includes not only monetary policy adjustments but also targeted fiscal measures, structural reforms, and investments in key sectors.
By addressing the underlying factors contributing to inflation, such as supply chain bottlenecks, infrastructure deficiencies, and governance challenges, Nigeria can create a more conducive environment for sustainable growth.
This will not only alleviate the burden of rising prices on ordinary citizens but also foster a more resilient and competitive economy.
The time for incremental changes has passed. Bold and decisive action is required to steer Nigeria towards a brighter economic future.
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