CBN Management of Interest Rates and Forex and the Impact on Economic Growth!

Nick Agule
6 min readAug 4, 2021


Nick Agule

Twitter: @NickAgule


WhatsApp: +44 7495164578



At the end of a recent Monetary Policy Committee meeting, the Central Bank of Nigeria (CBN) announced certain policy measures which include:

1. That the Monetary Policy Rate (MPR) will be retained at 11.5%

2. Stop forex sales to Bureau De Change (BDC) operators for Personal Travel Allowance (PTA) and Business Travel Allowance (BTA) needs of customers. The CBN justified the decision on the abuse of regulations and rent seeking behaviours of the operators.

In our column this week, we will analyse if the CBN policy measures are helping or hurting the Nigerian economy.


The Monetary Policy Rate (MPR) is the interest rate the CBN pays to commercial banks and others who deposit money with the CBN. The MPR is perhaps the most important interest rate in Nigeria because it influences the rates commercial banks charge people to borrow money or pay on their savings. When the CBN sets a double digit MPR, it leads to double digit interest rate on borrowings which discourages businesses from borrowing to invest in the economy which in turn stunts economic growth! The current CBN MPR of 11.5% in comparison with the Bank of England rate of 0.1% is a clear pointer to how cheap it is for individuals and businesses to access loans in the UK compared to Nigeria. A 30-year mortgage in the UK goes for less than 5% interest whereas its equivalent in Nigeria will be in double digits interest rates above 20%! At this high interest rate, credit becomes so expensive in Nigeria that businesses and individuals are only able to invest from savings. And because individuals cannot access cheap credit to buy capital goods such as vehicles and/or houses, the tendency for corrupt practices increases as individuals especially government officials have to loot the treasury to raise enough funds to pay in full for the acquisition of these capital goods! If credit was cheaply available, almost every employee on a steady salary would be able to access a mortgage loan and buy a house and instead of paying rent, they will be defraying the mortgage over time and own the house at the end of the tenure. This will also boost the demand for houses which in turn will spur the builders to increase the stock of houses in the market and through this millions of construction jobs will be created all to the good of the economy.

It is recognised that a lower interest rate leads to increased consumption which leads to higher inflation and with Nigeria’s inflation rate at 18% it is understood why the CBN will want to hike the MPR to reduce consumption and control inflation. But this is where boosting local production comes in to complement monetary policy. Nigeria’s economy needs 200,000MW of electricity and it is being fed with 4,000MW which is even not always available with a string of grid system collapses. Thus, monetary policy must be combined with fiscal policy (adequate budgetary provision for infrastructure) to achieve economic growth and counter balance the impact of a lowered interest rate on inflation.

On another count, Nigeria is perhaps the only country where banks are at liberty to pay as low as 1% interest on savings and charge as high as over 20% on loans granted from these savings. Banks in Nigeria have become increasingly profitable at the expense of the economy! Because high interest charged on loans discourages borrowers, the banks resort to pinching from customer accounts through various charges including account maintenance fee, debit card issuance/maintenance fees, SMS charges etc. I bank with commercial banks in the UK and these banks offer fee-free banking, they issue debit cards for free, do not charge any fees like account maintenance, card maintenance, SMS etc because these banks are generating revenue from interest earned by lending to the economy!


The CBN’s policy of issuing Foreign Exchange (Forex) to importers of services which are readily available in Nigeria is harming the economy badly! On the one hand the CBN’s policy direction is to boost the local production of goods and services and on the other hand the same CBN is draining foreign reserves to issue foreign exchange (US dollars) to those who have elected to consume foreign services even as there are adequate and competitive local alternatives. If parents decide to send their children abroad for education even as there are local universities both public and privately owned in Nigeria that can compete favourably with their foreign counterparts, let those parents source for forex in the parallel market to fund their consumption choices. It does not make sense that the CBN drains the foreign reserves owned by 200 million Nigerians to fund the lifestyle of only a few hundreds or thousands of Nigerians who prefer foreign schools to the local ones. The same applies to those who travel out for holidays without patronising the local alternatives. Ditto for medical care etc. All these services are available in Nigeria and the CBN’s continuing to fund these consumption choices of a few at the expense of all Nigerians is directly contradictory to the CBN’s cardinal policy of supporting local production of goods and services.

There are producers in Nigeria who earn in foreign currencies. The CBN needs to allow the earners of foreign currencies to sell to users of foreign currencies at market determined rates instead of draining foreign reserves to defend the value of the Naira which is akin to a father using his wealth to buy JAMB result for a child who is not performing well academically! The best the father will do for this child is to allow him/her to find their true level. If the CBN allows the Naira to find its true level, it will help the economy because if imports become too expensive, consumers will be forced to look at local alternatives! This will in turn boost local production and hence economic growth!

As the CBN has rightly found out, the current policy of draining foreign reserves to issue forex to consumers of foreign goods/services only encourages rent seeking and it is counterproductive to continue with a policy that has proved to be a source of corruption and manipulation.


1. Nigeria’s MPR rate at 11.5% is well too high! The CBN must take decisive measures to influence and even arm-twist the banks to offer more affordable interest rates on loans to enable cheap access to credit by individuals and businesses. The CBN could adopt a policy of not allowing banks charge interest on loans above a threshold on the interest they pay on savings. Thus if a 5% threshold is adopted and banks pay interest on savings of 1%, such banks cannot charge interest on loans above 6%!

2. Nigeria must take decisive steps in creating the enabling environment to boost production to tame inflation rather than using monetary policies such as MPR which is harming the economy rather than boosting it. Basic infrastructure such as electricity must be made available through public, private or public/private partnerships. A state of emergency must be declared in the power sector (in the same way Covid has a presidential task force) to rescue Nigeria’s economy from total collapse due to lack of adequate power supply.

3. The CBN must stop immediately the issuance of forex to travellers, school fees, medical fees and such non productive services that some Nigerians have decided to consume abroad. If these Nigerians consume these services locally, it will help boost local production which leads to economic growth!


Nigeria’s economy will never grow at the expected levels with only 4,000MW electricity! This is abysmally so low it is inadequate to energise the economy. The high interest rates charged by banks on loans is also a kneel on the neck of Nigeria’s economic growth! Draining foreign reserves to fund the consumption pattern of the rich and well-to-do is also causing damage to the economy. Government must address all these matters if the policy measures to grow the economy are to be effective.