Paragraph 1: The CBN’s Shift to Orthodox Monetary Policy and its Impact
The Central Bank of Nigeria (CBN) embarked on a significant shift towards orthodox monetary policy in 2024, marking a departure from its previous interventionist approach. This change, initiated under Governor Olayemi Cardoso, aimed to address challenges such as soaring inflation exceeding 28% and volatile foreign exchange markets. The new policy focused on inflation targeting, market-determined credit allocation, monetary tightening, and rebuilding reserves. Preliminary results indicate modest gains, including a reduction in intervention lending and increased external reserves. However, the 2024 financial statement also reveals significant strains, particularly in liquidity management and operational expenses, highlighting the long road to full recovery.
Paragraph 2: Reining in Intervention Lending and Its Implications
A key feature of the CBN’s policy shift was the significant reduction in loans and receivables (a 26% decrease to N11.9 trillion), reflecting a deliberate move away from interventionist lending. While some lauded this move as restoring market discipline and allowing commercial banks to resume their traditional role in credit intermediation, others cautioned against entirely dismissing the role intervention programs played during economic downturns, such as the COVID-19 pandemic. These programs provided crucial support to vulnerable sectors like agriculture, manufacturing, and healthcare, acting as a stabilizing force in the absence of adequate fiscal responses. The debate remains about the long-term impact of reducing these interventions and whether the private sector can effectively fill the gap.
Paragraph 3: Growing External Reserves and Gold’s Contribution
Nigeria’s external reserves witnessed substantial growth in 2024, reaching N54.73 trillion, up from N29.98 trillion in 2023. This growth was largely driven by revaluation gains on the CBN’s gold holdings, fueled by a global surge in gold prices. The increase in gold’s value, now representing approximately 5.1% of Nigeria’s external reserves, highlights a global trend of central banks turning to tangible assets as a hedge against inflation and market volatility. The CBN also attributed reserve growth to improved portfolio investments, diaspora remittances, and federal government receipts, citing better coordination with the Nigerian National Petroleum Company Limited and enhanced engagement with the diaspora community. Despite these gains, analysts warned that vulnerabilities remain due to factors such as oil production challenges, import dependency, and global financial conditions.
Paragraph 4: The High Cost of Liquidity Management in the Fight Against Inflation
The CBN’s efforts to control inflation in 2024 came at a steep price. Liquidity management expenses tripled to N4.5 trillion, reflecting aggressive monetary tightening measures implemented throughout the year. The Monetary Policy Rate (MPR) was repeatedly raised, eventually reaching 27.50%, the highest in recent history. The CBN also intensified its open market operations (OMO), issuing bills to drain excess liquidity. These actions, combined with increased issuance of Nigerian Treasury Bills, aimed to curb money supply growth, reduce inflationary pressures, and support exchange rate stability following the liberalization of the foreign exchange market. However, this aggressive approach placed a significant strain on the CBN’s finances. Furthermore, currency issuance expenses quadrupled, exceeding N315 billion, due to the lingering costs of the 2022 naira redesign exercise.
Paragraph 5: Profitability and Underlying Financial Fragility
Despite returning to profitability in 2024, with a standalone surplus of N165.69 billion and a group net profit of N38.84 billion, the CBN’s financial statement revealed underlying vulnerabilities. While total assets and liabilities increased, group equity declined, indicating a potential weakening of the bank’s financial position. Increased interest income was offset by even larger increases in interest expenses, largely due to the high cost of liquidity management. Massive losses on derivative settlements, exceeding N13.88 trillion, further strained the CBN’s finances. These settlements, though necessary to clear backlogs of forward foreign exchange contracts and restore credibility in the FX market, exposed the legacy of past risk management practices. The CBN’s share of profits from equity-accounted investees and fair value gains helped mitigate these losses, ultimately contributing to the reported profit.
Paragraph 6: Expert Assessment and the Road Ahead
Experts acknowledge the positive steps taken by the CBN, including improved expense discipline, clearer policy direction, and enhanced communication. However, the substantial liquidity management costs and derivative losses underscore the ongoing challenges stemming from past distortions. The road to full recovery requires addressing these structural issues and implementing sustainable solutions. Analysts emphasize the importance of consistency in policy implementation and the need for strategies that incorporate market-driven solutions, ensuring alignment with actual market needs to maintain investor and business confidence. While the return to orthodox monetary policy signifies progress, sustained efforts are crucial to overcome inherited vulnerabilities and strengthen the CBN’s long-term financial health.
