How Nigeria's monetary policy is affecting small business growth

The central bank of Nigeria is expected to tighten its monetary policy further by raising its policy rate to 19.00% by end-2023.
Consumer price inflation is expected to remain high due to elevated food prices, incentivising the central bank to continue tightening monetary policy.
However, weakening economic fundamentals and pressure on Nigeria's fiscal account may discourage the central bank from raising the policy rate beyond 19.00%.

The Central Bank of Nigeria is expected to tighten its monetary policy further to combat rising inflation, according to a recent report by Fitch Solutions. The report forecasts that the Central Bank of Nigeria (CBN) will increase its policy rate to 19.00% by the end of 2023 after already hiking by 50 basis points (bps) to 18.00% in March.

What It Means for Small Businesses and SMEs

On the one hand, the tightening of monetary policy means that borrowing money will become more expensive for small businesses and citizens, as interest rates on loans will likely increase. This could make it more difficult for small businesses to access the capital they need to grow and expand their operations. Additionally, with less money circulating in the economy, consumer spending and demand for small businesses may decrease.

A towel with a print of the Nigerian naira is displayed for sale at a street market - February 4, 2016. REUTERS/Akintunde Akinleye/File Photo Reuters/Akintunde Akinleye

On the other hand, the tightening of monetary policy could help to curb inflation, which has been driven by elevated food prices in the country. This could help to stabilise the economy in the long run, making it easier for small businesses and SMEs to plan for the future.

However, the uncertain economic environment in Nigeria may make it difficult for small businesses and SMEs to navigate the changes that come with the tightening of monetary policy. Weakening economic fundamentals and pressure on Nigeria's fiscal account may discourage the CBN from raising interest rates beyond 19.00%, adding to the uncertainty.

Moreover, the demonetisation of high-value naira notes could result in acute cash shortages, which may disrupt commercial operations. The purchasing managers' index has already plummeted, indicating deteriorating business conditions. Given a struggling oil sector and strong price pressures, GDP growth is expected to ease from 3.1% in 2022 to just 2.3% in 2023. This environment could make it more difficult for small businesses and SMEs to thrive.

Nigeria's new naira notes Google

In conclusion, the tightening of monetary policy in Nigeria will likely have a mixed impact on small businesses and SMEs. While it may make borrowing more expensive and reduce demand, it could also help to curb inflation and stabilise the economy in the long run. However, the uncertain economic environment may make it difficult for small businesses and SMEs to navigate the changes that come with the tightening of monetary policy.