This feature article explores how the monetary policy reforms of the Central Bank in the last one year have shaped the nation’s financial system, tackling key issues such as inflation, exchange rate management, and banking sector stability.
When Olayemi Cardoso took the helm of the Central Bank of Nigeria (CBN) in September 2023, he inherited a financial sector grappling with significant challenges, from inflationary pressures to a volatile exchange rate and a fragile banking system. One year into his tenure, the Nigerian economy has seen a mix of stabilization efforts and reforms that are restoring confidence, albeit with some challenges remaining.
Before Cardoso’s appointment, the Nigerian financial sector was reeling from high inflation, supply chain disruptions, and a significant gap between official and parallel exchange rates in the foreign exchange market. Inflation reached troubling heights, surpassing 33% by mid-2023, while the naira experienced persistent volatility. The central bank’s multiple exchange rates were criticized for fostering market distortions and eroding investor confidence.
One of the major moves under Cardoso’s supervision has been the unification of the exchange rates, a bold step that sought to streamline the market and enhance liquidity. This reform, while effective in curbing arbitrage and restoring some investor confidence, came with the challenge of increased volatility, reflecting Nigeria’s reliance on oil exports.
By addressing the foreign exchange backlog—clearing over $7 billion in outstanding obligations—the CBN also signaled its commitment to restoring market stability.
That move helped rebuild trust among foreign investors, contributing to renewed interest in Nigeria’s financial markets, particularly in early 2024, when portfolio investments surged.
However, critics have argued that the timeline and scale of recapitalization could create unintended consequences. While larger banks with strong financial backing may have little trouble meeting the new thresholds, smaller banks could struggle to raise capital in an environment of rising interest rates and uncertain economic growth. Some analysts fear that this could lead to a wave of forced mergers, reducing competition in the banking sector. A less competitive landscape may result in higher borrowing costs for businesses and consumers, undermining the very economic growth the policy is designed to foster.
Economic analyst Osuji Okonkwo said the ability of these recapitalized banks to contribute meaningfully to economic growth depends on the broader economic environment. With inflation still elevated and borrowing costs high, the effectiveness of a stronger banking sector in stimulating investment remains to be seen. “Thus, while the recapitalization initiative is a commendable move toward stability, its real impact may depend on complementary fiscal and monetary policies that create a conducive environment for growth,” he told me in his assessment of the policy.
The CBN under Cardoso raised the Monetary Policy Rate (MPR) to 27. 25% in a bid to combat inflation. By August 2024, inflation had slightly eased, but the trade-off was the rising cost of borrowing, which has affected small and medium-sized enterprises (SMEs), crucial drivers of employment.
Under Cardoso’s leadership, the CBN has adopted a contractionary monetary policy stance aimed at curbing inflation, which had been rising for over 19 months. One of the first major actions was to raise the Monetary Policy Rate (MPR) to 26.75%, a record high, to rein in inflationary pressures and stabilize the economy. This aggressive tightening of monetary policy was accompanied by adjustments to the Cash Reserve Ratio (CRR) and the Liquidity Ratio, designed to reduce liquidity in the banking sector and curb excess demand in the economy.
The results of these policies have been mixed. On the one hand, the inflation momentum slowed significantly by mid-2024, with the inflation rate falling from 33.4% in July to 32.15% in August. This decline, though modest, marks the first drop in inflation in almost two years, signalling the effectiveness of the CBN’s monetary tightening.
On the other hand, the high MPR has raised concerns among businesses and consumers. The cost of borrowing has skyrocketed, making it difficult for businesses to secure loans for expansion or investment. Small and medium-sized enterprises (SMEs), which are key drivers of employment and growth in Nigeria, have been particularly affected. For consumers, the high cost of credit has exacerbated the cost-of-living crisis, as individuals find it harder to access affordable loans for housing, education, and other necessities.
While inflation moderation suggests some success, concerns remain about stifling growth through prolonged monetary tightening.
Another significant reform is the CBN’s recapitalization mandate for Nigerian banks, aimed at strengthening the banking sector’s resilience. Set to be fully implemented by March 2026, this policy will increase banks’ lending capacity, attract foreign direct investment, and improve governance structures.
Cardoso has emphasized that a well-capitalized banking sector is vital for economic stability, particularly as the country looks toward its ambitious GDP growth targets for the next decade.
Economic analyst, Steve Obeta said by fostering better alignment between fiscal and monetary policies, the CBN aims to create a more cohesive approach to economic management, which is crucial for long-term stability. He is among those who believe that the CBN’s efforts to improve monetary-fiscal coordination in recent times, particularly through the development of the Fiscal and Monetary Policy Coordination Framework (FMPCF) are steps in the right direction.
However, those who belong to that league underscore the need for improvement in the administration of activities of the central, the exchange unification efforts and drive to moderate the inflationary pressures to avoid a backlash that could happen from improper coordination of the measures to put the Nigerian economy on the part of stability. The central bank has made commendable strides in addressing immediate challenges, such as inflation and exchange rate volatility, but structural issues persist.
Promoting Financial Inclusion
In the fintech space, the CBN has made notable strides in promoting financial inclusion, granting licenses to microfinance institutions and supporting technological innovations that have broadened access to financial services. This push has reduced transaction costs and made banking services more accessible to underserved populations.
However, as the fintech ecosystem grows, so too do the challenges of regulation and ensuring consumer protection. The CBN has addressed this by enhancing its regulatory framework and resolving tens of thousands of consumer complaints, reflecting its commitment to transparency and trust.
A Mixed but Promising Outlook
Cardoso’s interventions have injected a measure of stability into Nigeria’s volatile financial sector, with inflation slowing down, exchange rates stabilizing, and investor confidence rebounding. However, the path forward is complex. Balancing inflation control with growth, and managing the volatility of a unified exchange rate system, are tasks that will require ongoing vigilance. Nevertheless, Cardoso’s policies have set a strong foundation for potential recovery, provided that structural reforms are sustained and the banking sector continues to strengthen.
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