Nigeria’s economic challenges have reached a critical point, driven by a combination of poor governance, shortsighted monetary policies, and economic mismanagement. In 2024, Nigeria grapples with skyrocketing inflation, high unemployment, and a rapidly depreciating naira. As of the third quarter, the inflation rate hit 32.7%, with the black-market exchange rate surpassing N1,700 per dollar.
The CBN’s continual reliance on increasing the Monetary Policy Rate (MPR) as a solution to these issues has proven insufficient, exacerbating the problem of access to capital and stalling economic growth.
The CBN raised the MPR to 27.25% in October 2024 in an attempt to curb inflation. However, this action primarily served to limit access to financing, hurting businesses and consumers. The sectors critical for Nigeria’s economic revival—agriculture, manufacturing, and infrastructure—remain starved of the capital they need for growth.
Increasing interest rates have only stifled the economy, creating a vicious cycle of low growth and persistent inflation. The policy lacks a comprehensive approach, focusing narrowly on the MPR rather than the broader money supply metrics, like M1, M2, and M3.
Monetary aggregates such as M1, M2, and M3 have expanded at alarming rates, contributing to the inflationary pressures in the economy. As of August 2024, Nigeria’s broad money supply (M3) stood at approximately N107.19 trillion, with M2 reaching N93.9 trillion earlier in the year. The most liquid portion of the money supply, M1, has seen significant increases as well.
aFrom February 2023 to February 2024, M3 surged from N53.3 trillion to N95.56 trillion, reflecting nearly 80% year-on-year growth. This significant rise in liquidity undermines efforts to control inflation solely by adjusting the MPR. A coordinated policy that also addresses the money supply is critical to stabilizing inflation and promoting sustainable growth.
Another area of concern is Nigeria’s mismanaged foreign exchange (FX) regime. The naira’s volatility has severely impacted the cost of imports and contributed to inflation. Instead of allowing the naira to float freely, the CBN needs to adopt a more targeted approach to allocating foreign exchange, prioritizing sectors like agriculture and energy that can drive economic recovery.
The oil sector, a critical source of foreign exchange, continues to be plagued by corruption and inefficiencies, with production falling to 1.2 million barrels per day. Mismanagement in this sector has reduced Nigeria’s capacity to generate the foreign exchange it desperately needs.
The Dangote Refinery, once seen as a solution to Nigeria’s fuel import dependency, has failed to deliver the expected benefits. Nigerians anticipated a reduction in Premium Motor Spirit (PMS) prices to between N300 and N500 per litre once the refinery became operational. Instead, prices have soared beyond N1,600 per litre at the Black Market, further exacerbating inflation and putting immense pressure on households. This is a transparency issue, not just within the oil and gas sector, but also involving the government, the NNPC, and the Dangote Refinery.
Nigeria’s growing reliance on external loans from institutions like the IMF and World Bank compounds the economic woes. With debt now exceeding 40% of GDP and debt servicing consuming over 70% of government revenues, the country finds itself trapped in a cycle of borrowing that limits its ability to invest in crucial areas like healthcare, education, and infrastructure.
Instead of seeking more loans, Nigeria needs to develop sustainable, homegrown solutions. The government must crack down on corruption, improve resource management, and focus on sectors that generate employment and foreign exchange.
One of Nigeria’s most pressing needs is policy coherence. Past attempts to diversify the economy away from oil dependence have failed due to corruption and vested interests. Many government programs lack the necessary infrastructure for implementation, and policies that could stimulate growth—such as subsidies and incentives for local production—are often poorly executed or abandoned.
For example, the ongoing subsidy regime in the oil sector is not only expensive, but it also distorts market prices and promotes inefficiency. The government could save billions by eliminating subsidies, investing in domestic refining capacity, and reallocating these funds to critical sectors like energy and agriculture. Nigeria’s power sector, in particular, has the potential to reduce production costs across industries, increase competitiveness, and lower inflation.
A more effective strategy would involve balancing MPR adjustments with interventions in the money supply. The CBN must work with fiscal authorities to manage M1, M2, and M3 more efficiently, rather than focusing solely on interest rates. By controlling the growth of the money supply, Nigeria can better manage inflation while ensuring that critical sectors receive the financing they need. This would prevent liquidity from flooding unproductive areas of the economy while making funds available for industries that generate jobs and foreign exchange.
Nigeria’s economic revival depends on implementing comprehensive structural reforms. Increasing interest rates alone will not resolve the country’s deep-seated economic problems. Instead, the government and the CBN must take coordinated action, addressing the broader money supply, reforming the oil and gas sector, and curbing reliance on external loans.
The government must also crack down on corruption and inefficiencies, particularly in the energy sector, while investing in sectors like agriculture and infrastructure that are vital for long-term growth. Only through these measures can Nigeria chart a path toward economic recovery and sustainable development.
Hanga wrote from Kano
