Nigeria’s central bank has increased the interest rates on short-term debt obligations in a bid to attract foreign investors and stabilize the naira, the country’s currency.
The Abuja-based Central Bank of Nigeria (CBN) sold one trillion naira ($696 million) in treasury bills to both local and foreign investors at rates that were nearly twice the level of previous offers. Yields for the one-year bill rose to 19%, the highest in 12 years, from 11.5% at the previous auction on Jan. 24.
The move comes amid rising inflation and slowing economic growth in Africa’s largest economy, which is still recovering from the impact of the coronavirus pandemic and lower oil prices. The headline inflation rate in Nigeria accelerated for the sixth month to 22.79% in June 2023, its highest since September 2005, from 22.41% in the prior month.
The CBN has been under pressure from the new administration of President Bola Tinubu, who took office in May 2023 after defeating incumbent Muhammadu Buhari in a historic election. Tinubu, a former governor of Lagos state and a business tycoon has vowed to implement sweeping reforms to boost the economy, create jobs, and improve security.
One of his first moves was to suspend CBN governor Godwin Emefiele, who had used unorthodox policies to keep the naira artificially strong and lent directly to businesses to try to stimulate growth. Tinubu appointed Folashodun Shonubi, a former deputy governor of the CBN, as the acting governor pending a confirmation by the Senate.
Shonubi, who chaired his first monetary policy committee (MPC) meeting on Tuesday, said the decision to hike interest rates was driven by the need to curb inflation, support the naira and attract foreign exchange inflows. He said the CBN would also adopt a more flexible exchange rate regime and phase out the petrol subsidy, which has been a major drain on the government’s finances.
Analysts welcomed the CBN’s policy shift, saying it would help restore confidence in the economy and ease the pressure on the naira, which has been trading at a wide gap between the official and parallel markets. They also said it would improve the country’s external reserves, which stood at $33.4 billion as of January 2024, down from $36.2 billion a year ago.
However, they also warned that higher interest rates could hurt the recovery of the real sector, especially small and medium enterprises, which have been struggling to access credit and cope with the effects of the pandemic. They also said the CBN would need to complement its monetary policy with fiscal and structural reforms to address the underlying challenges of the economy, such as infrastructure, governance, and security.
Nigeria, which has a population of about 200 million people, is expected to grow by 2.5% in 2024, according to the International Monetary Fund, after contracting by 1.8% in 2023. The country, which is also the continent’s top oil producer, has been diversifying its economy away from its dependence on crude exports, which account for about 90% of its foreign exchange earnings and 60% of its government revenue.
The CBN said it would continue to monitor the economic situation and adjust its policy stance accordingly. It also expressed optimism that the economy would rebound in the medium term, as the vaccination program progresses and the global oil demand improves.
Source: Bloomberg
