Levers for Economic Growth

Obinna Chima
This week, the Nigerian economy experienced two major incidents that are critical building blocks for sustained long-run economic growth. The first was the rebasing of the Consumer Price Index (CPI), which measures the average change over time in the prices paid by consumers for a representative basket of consumer goods and services, and the other was Thursday’s decision of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) to pause its monetary tightening regime and (left) leave all its key monetary policy tools unchanged. The decision to halt the tightening regime, which had been in place since 2022, followed recent stability in the foreign exchange market and gradual moderation in the price of petrol.
Inflation in the past 18 months has significantly dealt with Nigerians, causing a sharp rise in the cost of living and making it difficult for many to afford basic necessities like food, leading to widespread struggles and hardship. High inflation distorts consumer behaviour. It also destabilises markets by creating unnecessary shortages. Likewise, high inflation, which is not the desire of any economy, leads to income redistribution and brings about weak purchasing power. That is why central banks globally are never comfortable with a rising inflation rate, usually seen by them as ‘evil.’
Following the rebasing exercise, the CPI declined to 24.48 percent year on year in January, according to the National Bureau of Statistics (NBS), compared with the 34.80 percent in December, which was printed under the old template. The rebasing meant updating the reference year used to gauge price levels in the country by essentially changing the basket of goods and services used to measure inflation. This was done to better reflect current consumer spending patterns and ensure the inflation data accurately reflects the economy’s current state.
It involved replacing outdated items with new ones that better represent what people are buying today. What this meant was that unlike in the past, where the base year was 2009, the base year for the current template is 2024, meaning that the NBS now compares prices in 2025 with that of 2024 instead of 2009 which was being used previously.
Under the new CPI base year, there are 960 items in the basket, whereas in the 2009 basket, there were 740 items, and the weight assigned to each of the products in the basket are not the same. The exercise is basically to make adjustments to developments within the economy over time and capture improvements, innovations and changes in consumption patterns therein.
The rebased data are expected to reflect present inflationary pressure within the economy to support policymakers, firms, and analysts in decision-making.
Accurate data allows for more effective interventions to control inflation and promote economic stability. With this, businesses and investors can make informed decisions about investments and pricing. This will enable the government to identify high-growth sectors for scaling and low-growth areas that require targeted interventions for balanced development.
Now to the MPC decision. Monetary policy plays a stabilising role in influencing economic growth through a number of channels. Inflation expectations are (an) important factorS in monetary policy decisions. And with actual inflation far off target in the country, there has been an increased focus on inflation expectations and whether they remain anchored. That was why after the unveiling of the rebased CPI figures for January, the general expectation was for the MPC to pause its aggressive restrictive monetary policy. As expected, the CBN retained the Monetary Policy Rate (MPR), the benchmark interest, at 27.50 percent, with the asymmetric corridor of +500/-100 basis points around the MPR. It also left all monetary policy parameters unchanged, including the Cash Reserve Ratio (CRR) of Deposit Money Banks (DMBs) at 50 percent, and that of Merchant Banks at 16 per cent, as well as the Liquidity Ratio (LR) at 30 percent.
CBN Governor, Mr. Olayemi Cardoso, said the committee was unanimous in its decision to hold rates at current levels, having expressed satisfaction with recent macroeconomic developments, which were expected to positively impact price dynamics in the near to medium term.
Cardoso also said there had been greater confidence in the markets, a key ingredient that was missing in the equation.
He also said CBN was now in a better position to begin the process of moderating rates, adding that stability remains important, and “if investors do not see stability, they do not come to those markets.”
Cardoso said MPC was particularly impressed by the stability in the FX market.
The CBN governor said the committee recognised the recent rebasing of the CPI by the NBS, adding that following major policy measures undertaken by the monetary and fiscal authorities, the flow of foreign direct and portfolio investments, as well as diaspora remittances are expected to increase as investor and stakeholder confidence improved.
Cardoso also pointed out that the improvement in oil production, which was 1.54 million barrels per day (mbpd) at the end of January 2025, will enhance the current account position of the balance of payments with the attendant positive impact on external reserves.
Clearly, the pause by the MPC can achieve the dual goals of buying time to assess more economic data and continue to control inflation and inflation expectations. This also provides businesses and consumers with some breathing room, allowing them to adjust to existing higher rates, potentially leading to increased borrowing and investment, which can stimulate economic activity and stabilise growth trajectories.
Also, with the inflation rate now below the benchmark interest rate, the decision to hold was positive for the economy as the real rate of return is now positive in Nigeria with the MPR higher than inflation. With this, investors can now derive value from their financial assets.
However, beyond the two macroeconomic indicators that have been largely viewed as levers for economic growth, the federal government needs to also focus on policies that would encourage local production of goods and services, as well as to aggressively drive exports to increase foreign currency inflows to the country.
Similarly, policies that discourage imports should be introduced, while encouraging productivity, both in terms of tax incentives. There is also a need to address the structural issues that have continued to impede growth and discourage investments in the country, such as insecurity, and crude oil theft, to unlock dollar liquidity inflow and encourage productivity.
Additionally, beyond the CPI rebasing and hold on interest rate, there should be efforts to improve fiscal transparency and reduce costs of doing business, which would be helpful not only in terms of their favorable effects on nominal stability and growth but also through positive effects on broad institutions.
Finally, there is also a need for better coordination between the fiscal and monetary policies to win the battle against inflation and lower interest rate.