Monetary Policy Tightening May Not Curb Inflation- World Bank Warns CBN

The World Bank has cautioned that the Central Bank of Nigeria’s (CBN) aggressive monetary policy tightening may fail to control inflation and pose a significant risk to Nigeria’s economic growth.

This warning was issued in the World Bank’s latest Global Economic Prospects report titled “Growth Stabilizing But at a Weak Pace,” released on Wednesday.

The report forecasts Nigeria’s economic growth at 3.3% for 2024, the same as earlier projections, and 3.5% for 2025. These growth rates are expected despite Nigeria recording a 2.9% growth in 2023, attributed to reforms in the petroleum and foreign exchange sectors under the current administration.

“Growth in Nigeria is projected to pick up to 3.3% this year and 3.5% in 2025,” the report states. “After the macroeconomic reforms’ initial shock, economic conditions are expected to gradually improve, resulting in sustained, but still-modest growth in the non-oil economy. In addition, the oil sector is expected to stabilize as production somewhat recovers.”

However, the World Bank highlighted that the CBN’s monetary policy tightening remains a substantial risk. Since the beginning of the year, the CBN has increased interest rates by a combined 750 basis points.

“Risks to Nigeria’s growth outlook are substantial, including the possibility that the tightening of monetary policy stops short of reining in inflation,” the report adds.

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Nigerians have been grappling with the effects of economic policies such as the removal of fuel subsidies and the unification of the foreign exchange rate. These reforms have pushed inflation to its highest in 28 years, with food inflation reaching 40.53%.

In response, the CBN embarked on a series of interest rate hikes. The Monetary Policy Committee raised the Monetary Policy Rate (MPR) from 18.75% to 22.75%, shortly after Yemi Cardoso took office as CBN Governor. This was followed by further hikes, bringing the rate to 26.25%.

Despite these measures, the naira has depreciated significantly. At the end of 2023, the naira was valued at N907/$, and by February 2024, it had weakened to approximately N1,600/$.

Although the CBN argues that raising the MPR was necessary to control inflation, this has not been effective. The inflation rate, which was 29.90% in January before the MPR hike, increased to 33.69% by April 2023.

The World Bank report also noted concerns about public debt in Sub-Saharan Africa, warning that it will remain high if global interest rates stay elevated. “With public debt-service costs having surged in many SSA economies since the pandemic, the need for debt reduction in highly indebted countries has become substantial,” the report states. “Many SSA economies tightened their monetary policy to address rising inflation, resulting in increased financing costs. Public debt is expected to remain elevated over the forecast period.”

“If global interest rates remain high for longer than assumed in the baseline forecast, debt-service costs for SSA economies are likely to rise even further,” it continues. “When coupled with limited access to external financing at favorable interest rates, rising financing costs could markedly increase the risks of government debt distress—especially because debt restructuring in several SSA countries has been hampered by coordination problems among a diverse group of creditors.”

The World Bank’s caution underscores the complex economic challenges Nigeria faces, as policymakers navigate the dual pressures of curbing inflation and fostering growth amidst an unpredictable global financial landscape.