The International Monetary Fund (IMF) has criticized
Nigerian banks for quickly increasing lending rates whenever the Central Bank
of Nigeria (CBN) tightens monetary policy, while being reluctant to lower
borrowing costs or improve returns to savers when conditions ease.
At its latest Monetary Policy Committee (MPC) meeting,
the CBN retained the Monetary Policy Rate (MPR) at 26.5 percent. The apex bank
also maintained the Cash Reserve Ratio (CRR) at 45 percent for deposit money
banks, 16 percent for merchant banks, and 75 percent for non-Treasury Single
Account (TSA) public sector deposits.
In its June 2026 report titled “Nigeria: Selected
Issues,” the IMF noted that monetary policy transmission has become more
effective since the country unified its foreign exchange market in June 2023.
However, the Fund observed persistent distortions within the banking sector.
According to the report, Nigerian banks display what
economists describe as a “rockets-and-feathers” pattern. This means lending
rates rise rapidly when the CBN increases interest rates but fall much more
slowly when policy is relaxed.
The IMF explained that a 100-basis-point increase in
the MPR typically pushes Treasury bill and lending rates up by about 175 to 180
basis points almost immediately. In contrast, a similar reduction in the
benchmark rate only lowers lending rates by roughly 25 to 30 basis points.
The Fund said this imbalance shows banks quickly pass
on the effects of tighter monetary policy to customers and often amplify them,
but delay transmitting the benefits of lower rates. Meanwhile, deposit rates
remain largely unresponsive to policy changes.
The report further highlighted that savings deposit
rates have stayed between 3 and 7 percent despite the MPR reaching as high as
26.75 percent in 2024. The IMF attributed this to weak competition among banks
and the existence of “captive depositors” who have limited alternative
investment opportunities.
The Washington-based institution also noted that
Nigeria’s adoption of a market-driven foreign exchange system has significantly
altered inflation dynamics. Since the unification of exchange rate windows in
June 2023, currency movements have had a stronger influence on consumer prices.
The IMF added that global oil price shocks continue to
contribute to inflation, even when they boost export earnings and foreign
exchange inflows. While higher oil prices can strengthen the naira through
increased export revenues, they also raise transportation, logistics, and
production costs, which are eventually passed on to consumers.
The report warned against financing government budget
deficits through the CBN’s Ways and Means facility, arguing that such practices
increase inflationary pressures by expanding money supply and weakening the
currency.
To improve monetary policy effectiveness, the IMF
recommended that the CBN review and simplify its cash reserve ratio framework.
The Fund stated that the current 45 percent CRR remains excessively high and
should eventually be reduced as inflation moderates, economic stability
improves, and confidence in the naira strengthens.
The recommendation aligns with the CBN’s long-term
objective of bringing inflation back to single-digit levels.
Comments:
Leave a Reply