(Bloomberg) -- Nigerian central bank Governor Olayemi Cardoso said interest-rate increases had been necessary to curb sky-high inflation, as the World Bank backed the country’s sweeping economic reforms.
“Ours will be to continue orthodox monetary policy and using our tools to ensure that we can bring price stability to our economy,” Cardoso said at an event in Abuja, the capital, on Thursday to launch the Washington-based lender’s Nigeria Development Update Report.
Cardoso, whose appointment to the central bank helm in September 2023 was part of President Bola Tinubu’s bid to revive the West African economy after decades of stagnation, has delivered steep rate increases that have lifted the policy benchmark to 27.25%.
“If we didn’t take the preemptive step of hiking, inflation would be a lot worse by now,” Cardoso said, referring to the bank’s hawkish stance at its last policy meeting. Most economists had predicted a pause to its record tightening cycle after price pressures surged to 28-year highs. Officials will deliver their final rate decision of the year on Nov. 26.
In addition, Cardoso has halted the practice of financing government spending via an overdraft with the central bank, and has presided over a new freely-floating currency regime that was ordered by Tinubu after he took office last year.
That move, plus rolling back costly fuel subsidies, caused a cost of living crisis as the naira plunged and gas prices soared — sparking street protests even as it was applauded by international observers.
“The major policy reforms are starting to yield positive results,” Alex Sienaert, the World Bank’s lead economist for Nigeria, told the event. “We are seeing a fiscal consolidation underway with the fiscal deficit shrinking from 6.2% of GDP in the first half of last year to 4.4% first half of this year,” he said.
Currency reserves — a vital buffer against shocks — have risen to around $39 billion from less than $33 billion at the end of 2023, the bank said, which sees Nigeria’s gross domestic product growing 3.3% this year and by an average of 3.7% annually from 2025 to 2027.
To get the most out of the reforms, the World Bank urged Nigeria to maintain a tight monetary policy until inflation starts cooling. It sees inflation in the West African nation falling to 14.3% by 2027 from 32.7% at an annual rate in September.
Still, Finance Minister Wale Edun told the audience that ending the fuel subsidies and allowing the naira to float was already generating major savings.
Fuel subsidies cost Nigeria around $10 billion in 2022, while the policy of fixing the naira at an artificially strong level against the dollar also imposed a heavy burden on its finances.
“For the first time in 40 years, the vexed issue of fuel subsidy” and “foreign exchange costing 5% of GDP has gone,” Edun said. That brings “a huge benefit.”
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