Nigeria's high interest rate spread seen dragging GDP by 30%

…As Cardoso says CBN’s policies prevented inflation from reaching 42.8%

High interest rate spread in Nigerian banks could potentially drag the country’s economy by 20 to 30 percent, adding more pains to businesses and households whose spending power has been hammered, according to experts.

Tilewa Adebajo, chief executive officer (CEO) of Lagos-based CFG Advisory and Mustafa Chike-Obi, chairman and CEO of Bank Directors Association of Nigeria, made this position known during a programme on Arise TV Thursday.

“Nigeria has the highest interest rate spread in the world and the reason for this is that we have some very huge systemic challenges as you can see with inflation. From 2009 till date, Nigeria’s interest rate spread has been high,” Adebajo said.

Over the past few years, from 2023 to 2025, interest rate spreads in Nigerian banks have notably increased, reaching a record high from 6 percent to 19 percent, as reported by The CFG Advisory.

The interest rate spread refers to the difference between the rates banks charge on loans and those they offer on deposits.

Africa’s biggest oil producer is grappling with historical high interest rates induced by sky-high inflationary pressures. The rising rate is hammering borrowing costs and hurting business growth.

Chike-Obi explained that the Nigerian government — the fiscal and monetary sides — must balance rates for sustainable growth, noting that an increased oil production output of up to 500,000 barrels per day won’t even do the magic.

“This spread is what drags the economy down. Companies can’t borrow. There’s no access to credit. And people cannot save because we’re giving a very low rate for saving,” the Bank Directors Association chief said.

“I think our GDP could be 30 percent bigger if the spreads are less than 5 percent,” he said.

At the last monetary policy committee (MPC) meeting in November, the key interest rate was hiked by a token 25 basis points to 27.5 percent while the asymmetric corridor was unchanged at +500/-100.

The Cash Reserve Ratio (CRR) for Deposit Money Banks (DMBs) was equally left unchanged at 50 percent while the CRR for merchant banks also stood at 16 percent. The liquidity ratio was left unchanged too at 30 percent.

In their report entitled, ‘Adverse Effects of High Interest Rate Spreads on the Nigerian Economy,’ the duo said Nigeria’s high rate spreads are caused by regulatory requirements, monetary policy stance, liquidity and funding and higher credit risk.

Chike-Obi noted that one of the biggest concerns is the CRR, which he said is the highest in the world at 50 percent, followed by Turkey at 25 percent.

High CRR means for every naira deposit a bank gets, half of it must go to the Central Bank of Nigeria (CBN) – 50 percent at zero percent interest rate.

“If we are going to take a deposit that we should pay 20 percent for, we pay 10 percent because we have given 10 percent or half of it to the CBN. That’s the biggest impact on the interest rate spread,” Chike-Obi said.

A high interest rate spread economy suffers reduced investments, limited access to credit, crippling the operations of small businesses that form the backbone of every economy.

When rates are at record high, cost of borrowing automatically increases, limiting business expansion and slowing economic growth. Inequality and poverty rates deepen, with saving rates shrinking.

High interest rate spread seen fueling import dependency

Chika-Obi said the high-interest rate spreads in Nigerian banks is hindering banks from lending to key sectors of the economy that could catalyse growth needed to increase its GDP.

“Banks are not lending to construction, industry, manufacturing, and even to SMEs. The only people they are lending to are people who have a life cycle of six months or less – petroleum importers, export people.

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“Two years from now, our import dependency will actually increase. The highest cost today in business is financing cost. You look at businesses today, they’re not viable due to this interest rate spread,” he said.

He explained that high import dependency could further add pressure on the naira that has been relatively stable for the past two months.

The dollar supply side

Turning the corner requires Nigeria to think of how it can create more dollars to meet its foreign exchange demands, according to Chike-Obi, stressing that the outlook for 2025 remains bleak if the country is still dollar-starved.

“We need to maintain unorthodoxy,” Adebajo said, noting that improving the output gap could boost the economy and help reduce monetary response to fiscal issues.

CBN’s policies prevented inflation from reaching 42.8% – Cardoso

Meanwhile, Olayemi Cardoso, the CBN governor, said on Thursday that tightening policies by the bank halted inflation from reaching 42.81 percent by December, 2024.

Cardoso spoke in Abuja at the Monetary Policy Forum, which brought together, monetary and fiscal authorities, subject-matter experts, policymakers, scholars, and market economists to discuss developing economic issues, especially on how to manage anticipated disinflation process.

Data from the National Bureau of Statistics (NBS) indicate that inflation reached 34.80 percent, in December 2024, driven primarily by core inflation. Food inflation showed signs of moderation.

Addressing the forum, Cardoso recalled how liquidity injections since COVID-19 pandemic have created significant overhang, inflationary pressures and heightened foreign exchange volatility.

He said while those measures were intended to cushion immediate shocks from the pandemic, they did not translate into commensurate productivity growth. This, he said, underscores calls for a disciplined and coordinated approach to monetary policy to restore stability.

To contain rising inflation, CBN, in 2024, raised the Monetary Policy Rate (MPR) by cumulative 875 basis points to 27.50 percent. Cash Reserve Ratio (CRR) of Other Depository Corporations (ODCs) by 1750 basis points to 50.00 percent; and adjusted the asymmetric corridor around the MPR as well.

Cardoso reiterated that despite persisting inflation, these measures have paid off.

According to him, “Counterfactual estimates suggest that without these decisive policy interventions, inflation could have reached 42.81 percent by December 2024.”

The monetary forum is focused on a rigorous intellectual discourse, providing an opportunity to examine monetary policy formulation, implementation and outcomes, while offering evidence-based insights to enhance policy effectiveness.

He said while the CBN is fully committed to ensuring price stability, but is also mindful of the adverse effects of policies on growth and livelihoods.

“As we move forward into 2025, I am optimistic that we have turned a corner and that disinflation is within reach.”

Beyond monetary policy, he also listed other CBN’s critical reforms to strengthen the financial system and ensure macroeconomic stability. These include: Unified multiple exchange rate windows to enhance efficiency in the FX market; clearing of the $7 billion FX backlog, which has restored market confidence and improved liquidity, as well as the new FX Code launched recently, among others.

He said the reforms reflect commitment to creating an enabling environment for inclusive economic development.

“As we shift from unorthodox to orthodox monetary policy, the CBN remains committed to restoring confidence, strengthening policy credibility, and staying focused on its core mandate of price stability.

“Encouragingly, the results are becoming evident. FX liquidity is improving, fostering greater stability in the market. The naira is gradually aligning with market fundamentals, creating a more predictable environment for domestic production, exports, and essential imports,” the governor told the gathering.