High interest rate increasing loan default rate – CPPE CEO

As Nigeria heads into 2025, the Central Bank of Nigeria (CBN) has been advised to soften its tightening stance to support investment growth and job creation in the economy.

The Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, gave this advice in his Nigeria 2024 review and 2025 outlook released at the weekend.

He stated that the current high-interest regime, driven by the tightening stance of the CBN, increases the risk of loan defaults, raising the likelihood of higher non-performing loans in the financial sector.

He further noted that high-interest rates increase debt service costs for the government, given its substantial exposure to domestic debt.

“High interest rates typically pose significant risks to business sustainability amid numerous headwinds,” he said, adding that there is a need to protect the real economy from the adverse consequences of free-market principles.

“This is the basis of government intervention in a market economy,” Yusuf said.

Dr. Yusuf commended the resilience of the Nigerian economy, highlighting its gross domestic product (GDP) performance in 2024 despite intense macroeconomic headwinds. He stated that the GDP grew by 2.98% in the first quarter, 3.19% in the second quarter, and 3.46% in the third quarter, predicting a year-end growth of approximately 3.6%.

“This aligns with IMF forecasts for GDP growth in Sub-Saharan Africa, which stands at 3.6%, and is better than the global GDP forecast of 3.2%,” he said.

He also warned about the dangers of allowing the services sector to dominate sectoral growth performance.

According to him, the implication is that sectors with high job creation potential and prospects for economic inclusion are still struggling.

He insisted that this situation must be reversed to address high unemployment and reduce poverty, noting that the disparity between the growth of financial services and the rest of the economy reflects the growing decoupling of the financial services sector from the real economy.

“It also exemplifies the failure of the financial intermediation role of the financial services sector in the Nigerian economy,” he said.

“This is a significant dysfunction in the economy, which deserves the urgent attention of policymakers.

“The current reality is that investing in financial instruments has become much more profitable than investing in the real economy. The risk is also very low. This is inconsistent with our economic aspirations, as it serves as a major disincentive to real sector investment.”

Yusuf stressed the need for appropriate policy measures to correct the disparity in profitability between the real economy and the financial economy, adding that there is a progressive crowding out of the real economy in financial markets.

He acknowledged that the non-oil sector has continued to dominate the economic space, contributing 94.43% of the country’s GDP in Q3 2024, while the oil sector contributed 5.57%. However, he noted a structural shortcoming in the economy, where sectors contributing significantly to GDP have minimal impact on foreign exchange earnings.

“This economic structure reflects the enormous productivity and competitiveness challenges of the non-oil sector of the Nigerian economy,” he said, urging policymakers to address these issues to improve the sector’s productivity and competitiveness.

“Most of these challenges are structural, including infrastructural deficits, funding constraints, regulatory issues, and general macroeconomic headwinds,” he added.

Looking ahead to 2025, Dr. Yusuf predicted a moderation in foreign exchange volatility, driven by improved foreign reserves exceeding $40 billion, increased inflows from international money transfer operators (IMTOs) and diaspora remittances, and the Central Bank’s capacity to moderate rate volatility through periodic forex market interventions.

He highlighted other positive factors, including the $2 billion Eurobond proceeds, a $500 million domestic dollar bond, the successful clearance of legacy forex obligations of about $7 billion by the CBN, and the import substitution effects of the Dangote and Port Harcourt refineries, which could ease demand pressure on the forex market.

Yusuf also pointed out that the easing of geopolitical tensions, coupled with the moderation of energy costs, could help reduce inflation in 2025.

He predicted that while monetary conditions might remain tight in 2025, the degree of tightening could decelerate due to the current high levels of the Monetary Policy Rate (MPR) and Cash Reserve Ratio (CRR).

“The space for further tightening has become limited,” he said.

He called on the government to expedite action to boost the capitalization of development finance institutions such as the Bank of Industry (BOI), Bank of Agriculture (BOA), and Nigeria Export-Import Bank (NEXIM) to deepen development finance interventions.