Nigeria’s High Interest Rates Likely to Persist, Says World Bank

The World Bank has projected that Nigeria, alongside Angola and Sierra Leone, will continue to experience high interest rates for an extended period due to persistent double-digit inflation and weakening domestic currencies. The bank highlighted this in its latest Africa’s Pulse report, which examines inflation trends across the continent.

Nigeria’s inflation, which spiked to 32.70% in September, following two months of slight decline, has been driven primarily by soaring fuel prices. This inflation surge has offset the expected relief from the harvest season on food prices, according to data from the National Bureau of Statistics.

In response, Nigeria’s Central Bank raised its benchmark interest rate by 50 basis points to 27.25% at the most recent Monetary Policy Committee meeting, in a bid to curb inflation. The Africa Pulse report suggests that Nigeria, along with Angola and Sierra Leone, is likely to maintain a “higher-for-longer” approach to monetary policy, as these countries continue grappling with significant inflationary pressures and currency devaluation.

“Central banks in countries with persistent double-digit inflation and weakened currencies, such as Nigeria, Angola, and Sierra Leone, will likely keep interest rates elevated for a longer period. In some cases, further rate hikes may be necessary, particularly in countries where inflation has yet to peak,” the World Bank report stated.

Key factors driving this approach include ongoing currency weakness, sluggish fiscal adjustments, and mounting cost pressures. Nigeria, alongside Ethiopia and Ghana, has been among the worst-performing economies in Africa in 2024, with continued currency devaluation exacerbating these challenges.

The naira has depreciated by approximately 43% year-to-date, making it one of the weakest currencies in Sub-Saharan Africa, alongside Ethiopia’s birr and South Sudan’s pound. The World Bank attributes this sharp depreciation to heightened demand for US dollars in Nigeria’s parallel market, limited foreign exchange inflows, and delays in dollar disbursements by the Central Bank of Nigeria.

The report also pointed out that socio-economic measures aimed at easing public discontent over the high cost of living, such as the partial reinstatement of fuel subsidies in Nigeria and wage hikes in Angola, are straining public finances. This fiscal pressure complicates efforts to stabilize these economies.

The World Bank emphasized the impact of dollar demand, stating, “By August 2024, the Ethiopian birr, Nigerian naira, and South Sudanese pound were among the worst-performing currencies in the region. The Nigerian naira, in particular, saw a year-to-date depreciation of about 43%. Surging demand for US dollars from financial institutions, non-financial end-users, and money managers, coupled with limited dollar inflows and slow foreign exchange disbursements, contributed to the naira’s weakening.”

As inflation remains stubbornly high and currency pressures persist, Nigeria’s economic outlook suggests that the current high interest rate environment will likely remain a critical feature of its monetary policy for the foreseeable future.