By Okafor Joseph Afam – January 31, 2025

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

High interest rate spreads in Nigerian banks could potentially shrink the country’s GDP by 20 to 30 percent, compounding economic hardship for businesses and households already struggling with weakened purchasing power, experts have warned.

Tilewa Adebajo, Chief Executive Officer (CEO) of Lagos-based CFG Advisory, and Mustafa Chike-Obi, Chairman and CEO of the Bank Directors Association of Nigeria, shared this assessment during a discussion on Arise TV on Thursday.

“Nigeria has the highest interest rate spread in the world, and the reason for this is the systemic challenges we face, especially with inflation. Since 2009, Nigeria’s interest rate spread has remained high,” Adebajo stated.

Rising Interest Rate Spread Hurting Businesses

Data from CFG Advisory indicate that from 2023 to 2025, the interest rate spread in Nigerian banks surged from 6 percent to a record high of 19 percent. The interest rate spread refers to the difference between the rates banks charge on loans and those they offer on deposits.

As Africa’s largest oil producer, Nigeria is grappling with historically high interest rates, driven by inflationary pressures. These rising rates are making borrowing more expensive and hindering business growth.

Chike-Obi emphasized that the Nigerian government—both fiscal and monetary policymakers—must strike a balance in interest rates to ensure sustainable growth. He noted that even an increase in oil production by 500,000 barrels per day would not be enough to offset the negative effects of high interest rate spreads.

“This spread is what drags the economy down. Companies can’t borrow, there’s no access to credit, and people cannot save because savings rates are too low,” he said.

He added, “Our GDP could be 30 percent bigger if the spreads were reduced to less than 5 percent.”

CBN’s Tight Monetary Policies

At its last Monetary Policy Committee (MPC) meeting in November 2024, the Central Bank of Nigeria (CBN) raised the benchmark interest rate by 25 basis points to 27.5 percent. The Cash Reserve Ratio (CRR) for Deposit Money Banks (DMBs) was left unchanged at 50 percent, while the liquidity ratio remained at 30 percent.

A report by CFG Advisory, titled Adverse Effects of High Interest Rate Spreads on the Nigerian Economy, identified regulatory requirements, monetary policy stance, liquidity and funding issues, and high credit risk as the primary drivers of Nigeria’s high-interest rate spreads.

Chike-Obi pointed out that Nigeria’s CRR—currently the highest in the world at 50 percent—is a major contributor to the problem. The second highest CRR is in Turkey, at 25 percent.

“Banks are forced to give half of every naira deposit to the CBN at zero percent interest. If we take a deposit that we should pay 20 percent for, we effectively pay 10 percent because half of it goes to the CBN. This is the biggest factor affecting interest rate spreads,” he explained.

High Borrowing Costs Crippling Economic Growth

A high interest rate spread economy suffers from reduced investment, limited access to credit, and weakened small businesses, which are crucial for economic growth.

“When rates are at record highs, borrowing costs increase, limiting business expansion and slowing economic growth. Inequality and poverty rates deepen as saving rates shrink,” Chike-Obi said.

He noted that Nigerian banks are avoiding lending to key sectors that could drive GDP growth.

“Banks are not lending to construction, industry, manufacturing, or SMEs. They are only financing businesses with a short-term life cycle—such as petroleum importers and exporters. If this continues, our import dependency will increase within the next two years,” he warned.

The high cost of financing is making many Nigerian businesses unviable, further straining the economy. Chike-Obi warned that excessive import dependence could worsen pressure on the naira, which has remained relatively stable in the past two months.

The Need to Increase Dollar Supply

To stabilize the economy, Chike-Obi urged the Nigerian government to focus on increasing foreign exchange (FX) inflows.

“We need to create more dollars to meet our foreign exchange demands. If we don’t address this issue, the 2025 economic outlook remains bleak,” he cautioned.

Adebajo added that Nigeria must adopt innovative economic strategies to close the output gap and reduce reliance on monetary tightening as a response to fiscal imbalances.

CBN’s Policies Averted 42.8% Inflation – Cardoso

Meanwhile, CBN Governor Olayemi Cardoso revealed on Thursday that the bank’s tightening measures prevented inflation from soaring to 42.81 percent by December 2024.

Cardoso made this statement in Abuja at the Monetary Policy Forum, which brought together monetary and fiscal authorities, policymakers, and economic experts to discuss Nigeria’s disinflation strategies.

According to data from the National Bureau of Statistics (NBS), inflation stood at 34.80 percent in December 2024, primarily driven by core inflation, though food inflation showed signs of moderation.

Cardoso explained that excessive liquidity injections since the COVID-19 pandemic had fueled inflationary pressures and forex volatility.

“While these liquidity measures were aimed at cushioning economic shocks, they did not lead to corresponding productivity growth. This highlights the need for a disciplined and coordinated approach to monetary policy,” he said.

To combat rising inflation, the CBN raised the Monetary Policy Rate (MPR) by a cumulative 875 basis points to 27.50 percent in 2024. The CRR was also raised by 1,750 basis points to 50.00 percent, while the asymmetric corridor around the MPR was adjusted.

Policy Reforms to Restore Economic Stability

Despite ongoing inflationary pressures, Cardoso maintained that these measures have had a stabilizing effect.

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

The forum highlighted efforts to strengthen Nigeria’s monetary policy framework, enhance liquidity management, and implement the newly launched FX Code.

“As we shift from unorthodox to orthodox monetary policy, the CBN remains committed to restoring confidence, strengthening policy credibility, and ensuring price stability,” Cardoso assured.

He added, “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.”

As Nigeria continues to grapple with high interest rate spreads and inflationary pressures, the coming months will test the effectiveness of the CBN’s monetary tightening measures in balancing growth and stability.