IMF Backs CBN’s Rate Reset, Insists Monetary Policy Remains Tight

The International Monetary Fund (IMF) has backed the Central Bank of Nigeria’s (CBN) decision to lower its benchmark interest rate, saying significant progress in taming inflation has created room for policy adjustment without easing the pressure on monetary conditions.

The Fund said the adjustment was appropriate, stressing that the reduction in the policy rate should not be mistaken for a shift towards an accommodative monetary policy stance. Director of the IMF’s African Department, Zeine Zeidane, stated this on Thursday at the African Department press briefing at the ongoing IMF/World Bank Annual Meetings in Bangkok, Thailand.

The CBN reduced the Monetary Policy Rate (MPR) by 350 basis points at its September Monetary Policy Committee (MPC) meeting, lowering it to 23 per cent from 26.5 per cent, marking a significant adjustment after a prolonged period of monetary tightening.

Zeidane said the decision reflected the progress made in bringing inflation down, allowing the apex bank to reduce the real interest rate without abandoning its restrictive policy stance.

“So they decided to normalise the monetary policy somewhat to lower that real interest rate, which is a component, in our view. It’s the right thing to do, and it’s not easing yet because the stance itself remains a tight stance,” he said.

The IMF’s position suggests that while Nigeria’s improving inflation outlook has created room for a recalibration of monetary policy, the central bank is yet to signal a broader shift towards cheaper credit.

Beyond monetary policy, the Fund said Nigeria’s growth outlook had improved on the back of higher oil prices, stronger foreign exchange receipts and rising external reserves. Deputy Director of the IMF’s African Department, Montfort Mlachila, said the favourable external environment had boosted foreign exchange inflows and liquidity in the economy, strengthening the outlook for economic growth.

“So, in terms of growth, Nigeria is benefiting from the improved oil prices, which have raised the amount of foreign exchange receipts and, therefore, reserves have also improved, and there’s more liquidity in the economy,” he said.

The Fund has projected Nigeria’s economy to grow by 4.2 per cent this year, up from four per cent in 2025, with growth expected to accelerate to 4.3 per cent in 2027. Mlachila attributed the improved outlook partly to the favourable external environment, noting that the services sector remained the principal driver of economic activity.

“Growth this year is largely driven, apart from benefiting from the very propitious external environment, growth in the economy is mostly driven by services,” he said.

He also pointed to the significant decline in inflation since 2025, saying the improvement had strengthened Nigeria’s overall macroeconomic conditions and supported better foreign exchange availability.

However, the IMF cautioned that sustaining the growth momentum would require the government to deepen structural reforms, improve the business environment and mobilise more domestic revenue, particularly from non-oil sources.

Zeidane said stronger revenue mobilisation would give the government greater fiscal space to fund critical sectors such as education, healthcare and infrastructure without relying excessively on oil receipts. “Our advice for the government has always been to, on one side, mobilise more domestic revenue outside the oil sector to create fiscal space for education, health infrastructure,” he said.

He said Nigeria’s large domestic market, young entrepreneurs and technology-savvy population offered considerable opportunities for private investment, but unlocking the potential would depend on addressing structural constraints. “But it’s important to do the structural reform in terms of governance, business environment, as I said, integration, and so all of these will certainly help accelerate growth and create jobs,” he said.

On energy subsidies, the IMF urged the government to ensure that savings from subsidy reforms were channelled towards vulnerable households rather than maintaining broad-based support that disproportionately benefits wealthier Nigerians.

Zeidane said energy subsidies often benefited those who needed government assistance the least, making targeted social protection a more effective way of cushioning the impact of economic reforms.

“Our advice on subsidies is that if you look at subsidies in general, and in particular energy subsidies, they benefit the wealthiest component of society. So, if you do a certain amount of subsidies, most of it is going to those who don’t need it,” he said.

He urged governments to phase out subsidies gradually and direct the resulting savings towards households most in need of support. “And our advice in many places has been to phase these subsidies gradually and make sure that what you save from the subsidy reform is well targeted to those who actually need it,” he said.

The IMF’s latest Regional Economic Outlook also identified foreign exchange market reforms and fuel subsidy reductions in Nigeria and Ethiopia as measures that had helped improve macroeconomic stability and strengthen the basis for private investment.

It said improvements in fiscal revenue and monetary policy frameworks, alongside structural reforms in South Africa, had contributed to more stable economic conditions across the region. “Foreign-exchange market reforms and fuel-subsidy reductions in Ethiopia and Nigeria, improvements in fiscal revenue and monetary frameworks, and structural reforms in South Africa have supported more stable macroeconomic conditions and a clearer basis for private investment,” the report stated.