“Additionally, while a stronger naira could help alleviate some inflationary pressures, it is unlikely to offer a long-term solution to the country’s economic challenges, particularly if underlying structural issues remain unaddressed.”
The Central Bank of Nigeria (CBN) has once again raised its benchmark interest rate, this time by a half percentage point to 27.25 percent. This marks the fifth consecutive increase, despite recent signs of easing inflation. The CBN’s monetary tightening has now added 850 basis points since last July, pushing the country’s borrowing costs to their highest levels on record. While the move is intended to stem inflationary pressures and stabilise the Nigerian economy, the wider implications, particularly for businesses and households, deserve closer scrutiny.
The justification for the CBN’s aggressive tightening is clear. Inflation had been persistently high for 19 months, driven largely by food price increases and a devalued naira. Recent data from the National Bureau of Statistics shows inflation has decelerated, falling to 32.15 percent in August. While this decline is modest, it marks a second consecutive drop and signals some success in the central bank’s efforts to curb runaway prices.
Yet the costs of this monetary restraint are being felt across the economy. Nigeria’s small and medium enterprises (SMEs) — which contribute nearly half of the country’s GDP and provide more than 80 percent of employment opportunities — are bearing the brunt. Higher borrowing costs are stifling business expansion and discouraging investment. Credit, the lifeblood of entrepreneurial activity, is now significantly more expensive, prompting many businesses to shelve growth plans or pass on increased costs to consumers. In a country where the unemployment rate already stands at an alarming 5.3 percent, these developments are particularly troubling.
The CBN’s rate hikes are based on the textbook logic that inflation is the result of “too much money chasing too few goods.” However, inflation in Nigeria is driven by deeper structural factors, many of which monetary policy alone cannot address. Corruption, fiscal mismanagement, and supply chain disruptions contribute significantly to price instability. Until these systemic issues are confronted, the effectiveness of monetary tightening will be limited. This was highlighted by Babatunde Adesanya, an economist at the University of Abuja, who observed that Nigeria’s inflation is not solely a monetary problem.
Indeed, the recent slowdown in inflation is due, in part, to seasonal factors, such as the harvest season, rather than purely the result of higher interest rates. As such, any long-term solution to Nigeria’s inflation problem must also tackle inefficiencies in agricultural production, energy supply, and governance. The central bank’s strategy, while necessary, risks being a short-term fix in the absence of broader structural reforms.
For Nigerian businesses, particularly those in manufacturing and retail, higher interest rates mean greater operational costs, which are ultimately passed on to consumers. This is increasing the cost-of-living crisis, even as inflation cools. More worrying is the fact that this policy could deepen inequality. While wealthier Nigerians may benefit from higher returns on savings and financial instruments, low-income households face shrinking disposable incomes as borrowing costs rise and wages stagnate. The risk here is that monetary policy, while aimed at curbing inflation, ends up disproportionately harming those least equipped to bear the burden.
The contractionary effect of high interest rates also raises questions about Nigeria’s economic growth prospects. SMEs are scaling back investment, and job creation is likely to slow. For a country with a rapidly growing population, this poses a significant challenge to long-term economic development. The CBN’s narrow focus on inflation control may well come at the expense of broader macroeconomic stability.
On the positive side, the CBN’s rate hikes could attract foreign capital inflows, as investors seek higher returns in Nigeria’s interest rate environment. This is particularly crucial given the naira’s dramatic 70 percent devaluation since it was allowed to float last June. There is hope that higher rates might support a more stable naira by improving dollar liquidity, as foreign investors buy into Nigerian assets.
However, this optimism must be tempered. Foreign investment in Nigerian markets has historically been volatile, with investors quick to pull out in times of uncertainty. Additionally, while a stronger naira could help alleviate some inflationary pressures, it is unlikely to offer a long-term solution to the country’s economic challenges, particularly if underlying structural issues remain unaddressed.
The CBN’s monetary policy is not without merit. Taming inflation is essential for restoring consumer confidence and stabilising Nigeria’s fragile economy. However, relying solely on interest rate hikes is a limited approach. The current environment of high borrowing costs risks stifling growth, exacerbating unemployment, and widening inequality.
Nigeria’s inflation crisis is a complex puzzle with multiple interlocking pieces. While monetary tightening can offer a temporary solution, the deeper roots of the problem lie in governance, structural inefficiencies, and systemic corruption. To achieve sustainable economic stability, a coordinated effort is needed to address these underlying issues.
Corruption, fiscal mismanagement, and inadequate infrastructure, particularly in energy and agriculture, are significant contributors to inflation. By tackling these problems head-on, Nigeria can create a more conducive environment for businesses and consumers. Monetary policy alone is like treating a symptom without addressing the underlying disease. Without comprehensive reforms, the short-term gains from interest rate hikes may be outweighed by long-term economic pain.
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