By Marcel Okeke

To the utter disappointment and shock of most businesses, analysts and ardent observers of the Nigerian economy, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) at its recent meeting voted to maintain a tight monetary stance. The MPC in a communique after its meeting (21-22, July 2025), said it was keeping the Monetary Policy Rate (MPR) unchanged for the third time at 27.50 per cent. As of May 2023, the MPR was 18.50 per cent!

The MPR (the benchmark interest rate for the economy) has been kept at this level for upwards of nine months—since November 2024—thus, sustaining very high effective interest rates charged by the deposit money banks (DMBs) at well over 30 per cent for their loan facilities. In addition to the high MPR, the MPC at their meeting also kept the Cash Reserve Ratio (CRR) at 50 per cent: a level that has largely constrained the credit creation capacity of the DMBs for long.

As of May 2023, the CRR was 32.5 per cent; but hiked to 50 per cent since November 2024. At this level, it means that DMBs are required to hold 50 per cent of their deposits in reserve with the CBN, rather than lending them out. The CBN, on its part, pays no interest to the DMBs for keeping such monies under the CRR requirements.

The high MPR and CRR have combined in choking businesses, by making borrowing costs very exorbitant; and even inaccessible to many. This, to a large extent, accounts for the high mortality rate or shrinking of space in the Micro, Small and Medium-scale Enterprises (MSMEs) sector. When the high cost/paucity or inaccessibility of funds is added to other challenges of the Nigerian operating environment, it gets clearer as to why not a few businesses have been asphyxiated.

This tight monetary regime sustained by the Olayemi Cardoso-led CBN via hiked MPR and CRR has not only shut out many businesses from loanable funds but also raised production cost, and rendered the environment uncompetitive for all. This, concomitantly, is a disincentive to Local Direct Investments (LDIs) in the real sectors of the Nigerian economy—mainly manufacturing, agriculture, etc.

In this regard, the Manufacturers Association of Nigeria (MAN), the Lagos Chamber of Commerce and Industry (LCCI), and the Nigeria Employers Consultative Association (NECA), have all disparately and jointly decried the high MPR, describing it as “inhibiting private sector development.” LCCI in a statement described the 27.50 per cent MPR as “too high for private sector development,” insisting that “monetary policy alone cannot be used to effectively address the high inflation issue in Nigeria.”

The MAN, deprecating the retention of the hiked MPR, argued that “this high interest rate is stifling the manufacturing sector and hindering economic growth,” pointing to a “global trend of interest rate reductions to stimulate economies, suggesting Nigeria is moving in the opposite direction.” MAN further warned that the tight monetary regime was hindering its members’ ability to invest in (business) expansion, modernization, and overall operations.

The Association of Small Business Owners of Nigeria (ASBON), on its part, says: “For us to stimulate production, create jobs, and truly support MSMEs, we need a more accommodative monetary policy that lowers the cost of borrowing.” President of ASBON, Dr. Femi Egbesola, says “I strongly appeal for a downward review of the rate… the current interest rate remains too high for small businesses to access credit and grow.”

Despite these appeals and advocacies for lower MPR, the apex bank has adamantly sustained the tight monetary regime. It has been deluding itself with the belief that it can successfully “fight” high inflation with ‘orthodox’ monetary policy instruments alone. Believing that the persisting hyperinflation in Nigeria was a monetary phenomenon, the CBN has kept deploying all in its arsenal to stem credit creation; and check high (volume) of money in circulation.

Apparently, the CBN has been deploying the hiked monetary policy instruments for some so-called other ‘gains’. Specifically, the apex bank has since been offering Government securities (Treasury Bills) and Bonds at very attractive rates to the patrons. Thus, with the MPR at 27.50 per cent, the CBN has been offering T-Bills at around 18—22 per cent (rate of return) per annum for a while.

This very high interest (yield) rate has been attracting huge investments from both Local Portfolio Investors (LPIs) and Foreign Portfolio Investors (FPIs). All this is as against foreign direct investments (FDIs) and (local) private investors who are scared by the generally costly and inclement Nigerian business environment.

The upshot of this trend has been substantial FPIs inflow; indeed, a bull run in the Nigeria Exchange (NGX) Limited, where businesses have resorted to seeking for (debt and equity) funds—in the face of highly costly bank loans. NGX data show that FPIs accounted for the bulk of foreign exchange (FX) inflow, which made up 56.30 per cent of total FX receipts in June 2025.

However, the rising FPIs inflow is a precipitate of the dangerously high interest environment created and sustained by the CBN. And FPIs are known to be “hot money” that ‘fly’ around the world. For Nigeria, FPIs inflow has led to a dependence on short-term, speculative capital, which quickly ‘flies away’, resulting in continued macroeconomic instability.

Worrisomely, too, the rising FPIs inflow is also underpinned by Nigeria’s deplorably poor and uncompetitive business environment, which not only scares FDIs but also causes the exit of not a few companies. This accounts for why most businesses that opted the leave Nigeria in recent times blamed the choking environment—particularly, the high cost of funds and worsening FX challenges.

Truth be told, it is high time the CBN began to rework its monetary policy mode to not only stimulate (real) investment in Nigeria but also to drive economic development. The so-called ‘gains’ from rising FPIs are neither sustainable nor dependable for economic recovery, growth and development. Let tight monetary regime begin to give way, gradually!

• The author, Okeke, a practicing Economist, Business Strategist, Sustainability expert and ex-Chief Economist of Zenith Bank Plc, lives in Lekki, Lagos. He can be reached via: obioraokeke2000@yahoo.com  (08033075697) SMS only