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IMF backs CBN on interest rate hike

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The International Monetary Fund (IMF) has supported the decision of the Monetary Policy Committee of the Central Bank of Nigeria to increase the benchmark borrowing rates by 400 basis points to 22.75 percent from 18.75 percent.

The MPC said at its February meeting that the hike in the MPR was “centred on the current inflationary and exchange rate pressures, projected inflation, and rising inflation expectations.”

“Members were concerned about the persistent rise in the level of inflation and emphasised the committee’s commitment to reverse the trend as the balance of risk leaned towards rising inflation.

“The committee, however, acknowledged the trade-off between the pursuit of output growth and taming inflation but was convinced that an enduring output expansion is possible only in an environment of low and stable inflation,” the committee stated in its communiqué.

In a statement on Tuesday at the end of the IMF staff visit to Nigeria, the fund said the decision by the MPC would help contain inflation and pressures on the naira.

“The team welcomed the Monetary Policy Committee’s decision to further tighten monetary policy. The MPC increased the policy rate by 400 basis points to 22.75 percent, for a total tightening of 1,025 basis points since May 2022. This decision should help contain inflation, which reached 29.9 percent year-on-year in January 2024, and pressures on the naira,” part of the statement said.

The IMF team, which was led by the IMF mission chief for Nigeria, Axel Schimmelpfennig, visited Lagos and Abuja on February 12–23, 2024, to hold discussions for the 2024 Article IV Consultations with Nigeria.

It was revealed that the team met with the Minister of Finance, Wale Edun; the Central Bank of Nigeria Governor, Olayemi Cardoso; senior government and central bank officials; the Ministries of Agriculture and Environment; as well as representatives from sub-nationals, the private sector, and civil society.

Schimmelpfennig added, “Nigeria’s economic outlook is challenging. Economic growth strengthened in the fourth quarter, with GDP growth reaching 2.8 percent in 2023. This falls slightly short of population growth dynamics.

“Improved oil production and an expected better harvest in the second half of the year are positive for 2024 GDP growth, which is projected to reach 3.2 percent, although high inflation, naira weakness, and policy tightening will provide headwinds.”

He added that, with about eight percent of Nigerians food insecure, addressing rising food insecurity should be the immediate policy priority of the government.

“In this regard, staff welcomed the authorities’ approval of an effective and well-targeted social protection system. The team also welcomed the government’s release of grains, seeds, and fertilisers, as well as Nigeria’s introduction of dry-season farming.

“Recent improvements in revenue collection and oil production are encouraging. Nigeria’s low revenue mobilisation constrains the government’s ability to respond to shocks and promote long-term development. Non-oil revenue collection improved by 0.8 percent of GDP in 2023, helped by naira depreciation. Oil production reached 1.65 million barrels per day in January as a result of enhanced security. The capping of fuel pump prices and electricity tariffs below cost recovery could have a fiscal cost of up to 3 percent of GDP in 2024,” he asserted.

On the social intervention programmeme, Schimmelpfennig said that the recently approved targeted social safety net programmeme providing cash transfers to vulnerable households needed to be fully implemented “before the government can address costly, implicit fuel and electricity subsidies in a manner that will ensure low-income households are protected.”

The IMF reduced its forecast for Nigeria’s economic growth to three percent in 2024, down from 3.1 percent projected in October 2023.

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