IMF Supports CBN's Decision To Raise Interest Rates

A total of 1,025 basis points have been tightened since May 2022 when the CBN's Monetary Policy Committee increased the policy rate by 400 basis points.

The Central Bank of Nigeria's decision to raise interest rates to 22.75 percent has received support from the International Monetary Fund (IMF).

The policy rate was increased by 400 basis points by the CBN's Monetary Policy Committee during its most recent meeting.

Also, the committee decided to maintain the 30% liquidity ratio and the 45% cash reserve ratio (CRR).

The high rate of inflation in Nigeria, which reached 29.9% in January 2024, made the naira more vulnerable. This spike represents a significant increase from 28.92 percent in December 2023 and is being driven by rising food prices.

Reactions to the MPC's move have been mixed, with some policy analysts voicing concerns.

Following the conclusion of its Article IV Mission to Nigeria in 2024, the IMF granted the endorsement.

The IMF team, led by Axel Schimmelpfennig, mission chief for Nigeria, held talks with Nigerian authorities in Lagos and Abuja from February 12 to 23, according to a statement released by the Fund on Monday.

The team met with prominent individuals during the visit, such as Olayemi Cardoso, the governor of the Central Bank of Nigeria; Wale Edun, the Minister of Finance and Coordinating Minister for the Economy; and senior government and central bank officials. Additionally, stakeholders from sub-national entities, the private sector, and civil society were met, as were representatives from the Ministries of Agriculture and the Environment.

“The team welcomed the Monetary Policy Committee (MPC)'s decision to further tighten monetary policy. The MPC increased the policy rate by 400 basis points to 22.75 per cent for a total tightening of 1,025 basis points since May 2022. This decision should help contain inflation, which reached 29.9 per cent year-on-year in January 2024, and pressures on the naira," Mr Schimmelpfennig said.

Nigeria's economy has recently had to contend with a number of difficulties, such as high inflation, depreciating currency, and fiscal pressures. It is anticipated that the increase in the policy rate will have repercussions for borrowing costs, investment choices, and overall economic activity.

In addition, Mr. Schimmelpfennig outlined the difficulties confronting Nigeria's economic prospects, pointing out that, although GDP growth in the fourth quarter of 2023 was 2.8%, it was still marginally below the dynamics of population growth.

Nigeria's GDP is predicted by the IMF to grow by 3.2% in 2024, primarily due to increased oil production and expectations for a better harvest in the latter half of the year.

Mr. Schimmelpfennig did, however, note that there would likely be substantial obstacles in the form of rising inflation, a weaker naira, and tighter policy.

“With about 8 per cent of Nigerians deemed food insecure, addressing rising food insecurity is the immediate policy priority. In this regard, staff welcomed the authorities' approval of an effective and well-targeted social protection system. The team also welcomed the government's release of grains, seeds, and fertilizers, as well as Nigeria's introduction of dry-season farming.

“Recent improvements in revenue collection and oil production are encouraging. Nigeria's low revenue mobilisation constrains the government's ability to respond to shocks and promote long-term development. Non-oil revenue collection improved by 0.8 per cent of GDP in 2023, helped by naira depreciation. Oil production reached 1.65 million barrels per day in January as a result of enhanced security. The capping of fuel pump prices and electricity tariffs below cost recovery could have a fiscal cost of up to 3 per cent of GDP in 2024.

“The recently approved targeted social safety net program that will provide cash transfers to vulnerable households needs to be fully implemented before the government can address costly, implicit fuel and electricity subsidies in a manner that will ensure low-income households are protected,” he said.