Nigeria’s private sector demonstrated a robust appetite for credit in November 2024, borrowing an additional N1.89 trillion and pushing the total credit portfolio to N75.96 trillion. This surge in borrowing occurred despite the Central Bank of Nigeria’s (CBN) persistent interest rate hikes, a key monetary policy tool designed to combat the nation’s soaring inflation rate, which reached 34.6% in November. This borrowing trend underscores the private sector’s reliance on credit to finance operations, even as the cost of borrowing continues to climb. The willingness of businesses to absorb higher financing costs suggests the pressing need for capital to maintain operations, potentially indicating a focus on short-term survival over long-term cost considerations. This situation raises critical questions about the effectiveness of the CBN’s monetary policy in curbing inflation and controlling credit growth.
The CBN, under Governor Yemi Cardoso, has aggressively pursued a tightening monetary policy throughout 2024, implementing six interest rate hikes. Beginning in February with a substantial 400 basis point increase, raising the Monetary Policy Rate (MPR) from 18.75% to 22.75%, the CBN continued to incrementally raise the MPR throughout the year. Subsequent hikes in March, May, July, September, and culminating in November, brought the MPR to 27.50%, a cumulative increase of 875 basis points. These measures, aimed at curbing inflation and stabilizing the economy, have seemingly not deterred private sector borrowing, indicating a disconnect between the intended impact of monetary policy and the actual market response.
The private sector’s borrowing behavior has exhibited significant fluctuations throughout 2024, reflecting the dynamic interplay of economic forces and the CBN’s policy interventions. Following a surge in borrowing in February to N80.86 trillion, likely driven by expectations of further rate hikes, March witnessed a sharp contraction of N9.65 trillion, bringing the total to N71.21 trillion. This contraction could suggest a brief period of cautionary spending in response to the rising cost of borrowing. Subsequent months saw a pattern of modest increases and declines, reflecting the ongoing struggle between the need for capital and the increasing cost of acquiring it. The November surge, reaching N75.96 trillion, suggests a renewed push for funding despite the elevated interest rates.
Comparing November 2024 to the same period in 2023 reveals a substantial increase in private sector credit, totaling N16.27 trillion, or a 27.3% growth. This year-on-year comparison highlights the continued reliance on credit as a vital resource for businesses navigating the challenging economic landscape. The significant growth in borrowing underscores the resilience of the private sector, but also raises concerns about the potential for over-reliance on debt financing and the long-term implications for financial stability. The consistent growth in borrowing despite the CBN’s intervention indicates that businesses prioritize access to capital, even at a higher cost, to maintain operations and, potentially, manage rising input costs driven by inflation.
The apparent ineffectiveness of interest rate hikes in curbing private sector borrowing casts doubt on the efficacy of the CBN’s current monetary policy approach. Traditional economic theory suggests that higher interest rates should disincentivize borrowing, but the Nigerian private sector’s behavior demonstrates a different reality. This disparity suggests that other factors, such as inflationary pressures, expectations of future economic conditions, and the limited availability of alternative financing options, are outweighing the impact of higher borrowing costs. The private sector’s continued reliance on credit despite rising interest rates suggests that access to finance is prioritized over its cost, indicating a desperate need for liquidity to maintain operations.
The Manufacturers Association of Nigeria (MAN) has voiced concerns about the CBN’s interest rate policy, arguing that the continuous hikes are counterproductive and exacerbate the challenging operating environment for manufacturers. MAN’s Director-General, Segun Ajayi-Kadir, has publicly called on the CBN to reconsider its approach, advocating for a combined monetary-fiscal strategy to address inflation. He highlighted the detrimental impact of rising production costs and shrinking consumer demand, amplified by declining purchasing power, on the manufacturing sector. This critique from a key industry stakeholder underlines the potential negative consequences of the CBN’s current monetary policy on critical sectors of the Nigerian economy. MAN’s call for a more comprehensive approach, incorporating fiscal measures, suggests a growing consensus that relying solely on interest rate adjustments may be inadequate to address the complex economic challenges facing Nigeria.
