The World Bank has cautioned that the Central Bank of Nigeria’s (CBN) development finance interventions are exacerbating inflationary pressures in the short term and undermining the bank’s ability to effectively control inflation.
In its latest Nigeria Development Update report, the World Bank noted that the CBN’s continued provision of subsidized funding to select sectors is distorting the market and hindering commercial banks’ ability to lend on a risk-adjusted basis. The report highlighted that the CBN’s share of private sector credit has increased from 6.5% in 2019 to 10% in 2021.
The World Bank emphasized that the CBN’s development finance interventions, although well-intentioned, need to be reevaluated and potentially scaled back to avoid fueling inflation and weakening the bank’s monetary policy effectiveness.
The report also stressed the importance of expanding government programs to support micro, small, and medium enterprises (MSMEs) to protect them from rising uncertainty and inflationary pressures.
Additionally, the World Bank warned that the banking system may face challenges in the coming quarters, particularly medium-sized banks that cater to SMEs and rely on CBN development finance, as loan quality is likely to deteriorate amidst rising production costs and borrowing rates.
