The Nigerian economy is facing a challenging scenario, characterized by a significant surge in credit to the government, outpacing the growth of credit to the private sector. Data from the Central Bank of Nigeria (CBN) reveals that credit to the government reached a staggering N42.02 trillion in September 2024, a dramatic increase of 89.79% compared to the same period in the previous year. While credit to the private sector also increased, reaching N75.85 trillion, the growth rate of 27.46% was significantly lower than the government’s borrowing surge. This disparity raises concerns about the potential crowding-out effect, where government borrowing absorbs available funds, leaving less capital for private sector investment and hindering economic growth. The substantial increase in government borrowing coincided with a period of aggressive interest rate hikes by the CBN, aimed at curbing inflation.
The CBN’s monetary policy tightening, including raising the Monetary Policy Rate (MPR) to 27.50% from 18.75% in December 2023, has had a noticeable impact on credit to the private sector. The increased cost of borrowing has dampened private sector investment and expansion. Despite the CBN’s efforts, credit to the government has exhibited volatility, with sharp increases observed, particularly in the third quarter of 2024. This surge in government borrowing raises concerns about its potential to further fuel inflation, despite the CBN’s stated objective of price stability. Experts point to the fact that a significant portion of government spending is directed towards consumption, including recurrent expenditure and debt servicing, rather than productive investments that could stimulate economic growth.
The CBN Governor, Olayemi Cardoso, has affirmed the bank’s commitment to maintaining a hawkish stance on monetary policy to combat inflation. This implies a continued focus on using tools like the MPR, Cash Reserve Ratio (CRR), and Open Market Operations (OMO) to manage liquidity and keep inflation under control. However, this approach raises concerns about the potential for further constriction of credit to the private sector, which could further stifle economic growth. Analysts argue that the CBN’s efforts to stabilize the economy and boost investor confidence will be undermined if fiscal policies do not complement the monetary measures.
Financial market analysts at Afrinvest highlight the contradiction between the CBN’s anti-inflationary stance and the rapid expansion of credit to the government, particularly given the government’s high consumption-based spending. They argue that this fiscal behavior contributes to foreign exchange volatility and exacerbates inflationary pressures. The substantial growth in the broad money supply (M3), outpacing the growth observed prior to Governor Cardoso’s tenure, further underscores the impact of increased government borrowing. This expansion, fueled by government borrowing, can contribute to inflationary pressures if not matched by a corresponding increase in productive output.
The prevailing economic situation underscores the urgent need for greater synergy between fiscal and monetary policies. Stakeholders, including the Minister of Industry, Senator John Enoh, emphasize the importance of fiscal measures to reduce the burden on monetary policy. They advocate for policies that address structural issues hindering private sector growth and reduce the government’s reliance on borrowing for consumption. This call for coordinated action highlights the recognition that relying solely on monetary policy is insufficient to address the complex economic challenges facing Nigeria.
Addressing the current economic challenges requires a multi-faceted approach. The government needs to prioritize fiscal discipline, reducing wasteful spending and directing resources towards productive investments that stimulate economic growth and improve the business environment. Simultaneously, the CBN needs to cautiously manage its monetary policy tightening to avoid unduly constraining private sector access to credit. A balanced and coordinated approach between fiscal and monetary policies is crucial to achieving sustainable economic growth and price stability in Nigeria. Furthermore, structural reforms aimed at improving the ease of doing business, reducing bureaucratic hurdles, and tackling corruption are essential for creating a conducive environment for private sector investment and long-term economic prosperity.
