The International Monetary Fund (IMF) recently highlighted the critical challenges faced by global economies, underscored by the ongoing “Great Tightening” – a period characterised by rising interest rates and tighter monetary policies to combat inflation.
This shift has profound implications for emerging markets like Nigeria, where economic vulnerabilities are exacerbated by high debt levels, inflationary pressures and supply-side disruptions.
The global inflationary landscape: Unraveling the causes
Global inflation has surged since the COVID-19 pandemic, fueled by several factors. Initially, lockdowns led to a shift in consumer demand from services to goods, exacerbating supply chain bottlenecks.
As economies reopened, demand pivoted back to services, placing additional pressure on industries already reeling from pandemic disruptions.
Central banks responded by implementing aggressive fiscal and monetary policies to keep economies afloat.
However, these measures, alongside geopolitical events like the war between Russia-Ukraine, further aggravated inflation. The war caused sharp increases in commodity prices, particularly energy and food, pushing inflation beyond what many economies had anticipated.
The inflationary spiral was amplified by sectoral supply constraints that hit industries differently, resulting in bottlenecks.
As demand rotated across sectors, industries struggled to keep pace, leading to higher prices. In turn, this steepened the Phillips Curve, which illustrates the trade-off between unemployment and inflation, making it more challenging for policymakers to reduce inflation without slowing economic growth.
For global policymakers, the solution to curbing inflation lies in tighter monetary policies. The IMF has endorsed this approach, with interest rates rising in several advanced and emerging markets. But what does this tighten mean for a nation like Nigeria?
Nigeria’s economic predicament: The weight of debt
Nigeria, Africa’s most populous nation, faces unique challenges exacerbated by global monetary tightening. While inflation is a worldwide issue, Nigeria’s economy is particularly vulnerable due to its heavy reliance on fluctuating oil revenues, and a persistent fiscal deficit.
The IMF’s “Great Tightening” – which involves raising interest rates to tame inflation – will have direct and indirect impacts on the country.
Inflation control and cost of living: A struggling population
Nigeria has struggled with high inflation for years, but the recent global inflation surge has worsened domestic conditions. In September 2024, the inflation rate reached 32.7 percent, according to the National Bureau of Statistics (NBS).
This rise was fueled by increasing food and transportation costs, particularly due to higher petrol prices. The soaring food prices, energy costs, and currency devaluation have strained household incomes, pushing millions deeper into poverty.
As the IMF tightens its monetary policies globally, borrowing costs for Nigeria will rise, making it more expensive for the government to service its debts and for businesses to invest.
Higher interest rates are likely to reduce aggregate demand, helping to bring inflation down, but this may come at the expense of slowing economic activity.
The Nigerian central bank has responded to economic pressures by raising its key interest rates significantly, increasing them by 850 basis points in 2024 alone. This adjustment brought the monetary policy rate (MPR) to 27.25 percent, up from 18.75 percent in January of the same year.
However, inflationary pressures persist due to structural challenges, including inadequate infrastructure, insecurity, and ongoing supply chain disruptions.
Debt sustainability and financing risks: A looming crisis
Nigeria’s debt profile has become a growing concern, especially as global interest rates rise, with public debt standing at over N121.67 trillion (approximately $91.46 billion) as of mid-2024.
Nigeria’s ability to manage and service its debt is under pressure. The IMF has warned that around 40 percent of sovereign bonds and 37 percent of corporate bonds worldwide will mature by 2026, and refinancing them under higher interest rates will be costly.
For Nigeria, this translates to higher external debt servicing costs, which already consume a significant portion of the national budget. According to the Debt Management Office (DMO) of Nigeria, in 2023, the country allocated over 90 percent of its revenue to debt servicing.
As global interest rates continue to rise, this burden will only increase, leaving the government with less capacity to invest in critical sectors such as education, healthcare, and infrastructure.
A fragile recovery
Nigeria’s economic growth has remained sluggish, with the IMF projecting GDP growth at 3.3 percent for 2024, up from 2.9 percent in 2023. However, the ongoing “Great Tightening” — marked by rising interest rates — poses risks to this recovery by potentially slowing investment and consumer spending.
However, there is an opportunity for Nigeria to weather the storm. The country could use this period of tightening to implement much-needed structural reforms aimed at boosting productivity and diversifying its economy.
Currently, Nigeria relies heavily on oil exports, which exposes the economy to volatile oil prices. A shift towards non-oil sectors, such as agriculture, technology, and manufacturing, could help buffer the economy against external shocks.
The Nigerian government’s recent push to boost non-oil exports and attract foreign investment could serve as a key driver of future growth.
Embracing reform
The IMF’s message to Nigeria and other emerging markets is clear: prudent fiscal management and economic reforms are crucial to handle the challenges posed by rising interest rates.
While inflation control through higher interest rates is necessary, it must be accompanied by policies that address the underlying structural weaknesses in the economy.
Abdulbasit Shuaib, a finance expert, emphasizes the critical need for Nigeria to diversify its revenue sources, manage debt effectively, increase social spending, and foster private sector development.
“These measures are vital for building a resilient economy that can sustain growth and stability in the face of global financial pressures,” he noted.
Yet, the global economic landscape is evolving rapidly, and Nigeria must act decisively to secure its position in an increasingly competitive and interconnected world. The IMF’s call for tighter policies should serve as a wake-up call for the country.
“This is the moment for Nigeria to embrace the necessary reforms that will pave the way for long-term stability and growth,” he added.
By taking proactive steps now, Nigeria can adapt to shifting dynamics and lay a solid foundation for a prosperous future.
