Nigeria Central Bank’s Tight Grip on Monetary Policy Squeezes Private Sector Credit by N1.07tn

In an economy of high-stakes monetary policies and stubborn inflation, Nigeria’s private sector credit took a measured tumble of N1.07 trillion (1.41%) in January 2025. The total credit slid to N74.88 trillion, down from N75.90 trillion in November 2024.

This decline echoes the Central Bank of Nigeria’s (CBN) persistent hawkish stance under Governor Yemi Cardoso, whose aggressive policies aimed at taming inflation are now sending ripples through business financing.

Curiously, the CBN did not publish data for December 2024, leaving analysts to piece together the puzzle. The Nairametrics Research Team stepped in, estimating an N536 billion drop in credit from November to December, putting December’s credit at about N75.42 trillion. The absence of official data has only fueled speculation about the broader impact of monetary tightening on Nigeria’s private sector.

For a bit of perspective, credit to the private sector was N76.47 trillion in January 2024. By December, based on estimates, it had slid to N75.42 trillion, a N1.05 trillion (1.38%) dip. This is a far cry from the growth seen earlier when credit surged from N62.54 trillion in December 2023 to a high of N76.48 trillion in January 2024. This credit expansion was a brief but significant chapter, ending when the CBN began its six straight Monetary Policy Rate (MPR) hikes from February 2024 onward.

The CBN’s unyielding rate hikes have set the tone for a tighter credit market, squeezing businesses with high borrowing costs. While the 0.71% month-on-month decline in January 2025 might seem modest, it adds to a broader trend where high interest rates are choking business credit access. Many businesses, especially small and medium enterprises (SMEs), are finding the credit market increasingly hostile, struggling to secure funding for growth and operations.

The credit crunch is not an isolated incident but a symptom of a broader strategy by the CBN to rein in inflation. The M3 money supply, which covers net foreign assets (NFA) and net domestic assets (NDA), has ballooned over the past year, standing at N108.97 trillion in November 2024, climbing to N109.41 trillion in September 2024, and peaking again in January 2025. This growing money supply, juxtaposed with declining private sector credit, highlights a peculiar situation where liquidity is present but not translating into accessible credit for businesses.

The sectoral breakdown of private sector credit tells its own story. The manufacturing sector maintained its lead, grabbing 14.1% of total credit. General commerce followed closely with 13.4%, agriculture took 9.2%, and the finance and insurance sector lagged with 7.3%. While the manufacturing and commerce sectors are soaking up credit, agriculture, and finance remain on the fringes, raising concerns about the distribution of credit and its impact on economic diversification.

Despite the tight credit conditions, Nigeria’s economy managed to post a 3.84% year-on-year growth in real terms in Q4 2024, improving on the 3.46% growth from the previous quarter. The annual real GDP growth rate hit 3.4% in 2024, a boost from 2.74% in 2023. However, the impressive GDP growth contrasts sharply with the private sector credit, which as a percentage of GDP, dropped to 27.81% in 2024 from 33.26% in 2023.

Comparatively, Sub-Saharan Africa reported an 8.19% increase in private sector credit by commercial banks as a share of GDP in 2023, reaching 27.73%. This regional growth underscores a more credit-friendly approach elsewhere, spotlighting Nigeria’s struggle to maintain a healthy credit-to-GDP ratio.

The high borrowing costs have not only slowed business expansion but also affected job creation. SMEs, which are the backbone of the economy, now find it increasingly difficult to survive, let alone thrive, in such a restrictive environment.

As Nigeria’s economy balances on this tightrope, expectations are high for the next CBN’s moves. There are calls for a more measured approach to monetary policy—one that still keeps inflation in check but does not starve the private sector of much-needed credit. The broader concern is that if the tightening continues unabated, the economic gains reflected in the GDP might not translate into tangible growth for businesses and households.

The CBN’s iron grip on the economy through stringent policies might have its merits, but the fallout is becoming increasingly clear. As businesses brace for what lies ahead, the hope is that a more balanced approach will emerge, offering a lifeline to Nigeria’s private sector and, by extension, the economy at large.