According to the World Bank, Nigeria, along with several other African countries facing rising Inflation and depreciating currencies, will likely sustain high interest rates for a prolonged duration. The recent Africa Pulse report from the bank indicates that nations such as Nigeria, Angola, and Sierra Leone are expected to maintain elevated interest rates while they work to control inflation and stabilise their monetary systems. This projection comes as Nigeria’s inflation rate soared to 32.70% in September, based on National Bureau of Statistics (NBS) data.
This uptick in inflation occurred after two months of decreases and was primarily influenced by rising fuel costs, which lessened the usual effects of the harvest season on food prices. The sudden increase has once more strained the nation’s economy, prompting The Central Bank of Nigeria (CBN) to respond promptly. In response to inflationary pressures, the Central Bank of Nigeria (CBN) recently increased its key Interest Rate by 50 basis points, setting it at 27.25%. This adjustment is part of the central bank’s comprehensive strategy to control inflation.
Naira was ranked among the worst-performing currencies in SSA.
Therefore, the World Bank indicates that Nigeria may persist with elevated interest rates for the foreseeable future, even as several other African nations begin to relax their monetary policy. It stated that Nations facing double-digit inflation and struggling currencies are likely to maintain elevated Monetary Policy rates for an extended period and might even raise them further in certain situations. This approach is essential, especially in nations still experiencing rising inflation or where declining local currencies are inflating expenses.
In Nigeria, the declining value of the Naira has intensified inflation challenges, hindering policymakers from adopting a more lenient stance on interest rates. In 2024, Nigeria’s naira was ranked among the worst-performing currencies in Sub-Saharan Africa. By late August, it experienced a depreciation of about 43% year-to-date, similar to the Ethiopian birr and the South Sudanese pound. The naira’s decline can be linked to various factors, such as an increased appetite for U.S. dollars in the informal market, restricted dollar inflows, and delays in foreign exchange releases from the Central Bank of Nigeria (CBN).
Continuous decline of the naira contributes to high interest rates.
The World Bank reports that various financial entities, non-financial businesses, and fund managers fuel the need for dollars in Nigeria. This situation has increased the strain on the naira, complicating the central bank’s efforts to handle foreign exchange reserves. The continuous decline of the naira is a significant factor contributing to Nigeria’s likely sustained high interest rates over the long term. Due to the rising Cost Of Living and the economic difficulties stemming from currency devaluation, Nigeria has reintroduced Fuel Subsidies to alleviate some of the financial strain on its populace.
Also, this decision has increased the strain on government finances, complicating efforts to establish sustainable solutions. Nigeria’s public finances are facing pressure from these actions, indicating that the nation is struggling to navigate the tension between responding to social discontent stemming from inflation and ensuring fiscal stability. Looking forward to the situation, the World Bank report highlights the necessity for Nigeria’s central bank to uphold a strict monetary policy to curb inflation and ensure stability for the naira.
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Moreover, increased interest rates introduce their own set of difficulties, especially for enterprises aiming to secure financing. The expensive borrowing conditions could hinder economic resurgence, making it challenging for businesses to invest and grow. Although the immediate economic forecast is challenging, the World Bank emphasised the necessity of implementing Structural Reforms in Nigeria. Initiatives like enhancing foreign exchange administration, lessening reliance on imports, and encouraging domestic production will be essential for tackling the underlying issues contributing to inflation and the decline of the currency.