By Michael Akugbe Ozigbo
The above simple proposition should frame Nigeria’s current economic policy debate.
The Central Bank of Nigeria (CBN) has maintained one of the highest monetary policy rates in the world. With the Monetary Policy Rate (MPR) at 26.5%, commercial bank lending rates have risen above 32%, reflecting the Bank’s determination to restore price stability and anchor inflation expectations. Yet inflation remains stubbornly high, private investment is subdued, manufacturing capacity is under pressure, and unemployment continues to rise.
This raises a fundamental question: If the medicine is being administered exactly as prescribed, why is the patient not recovering?
The answer is that Nigeria is attempting to solve a predominantly supply-side inflation problem with a policy instrument designed principally to restrain demand.
This is a case of the wrong instrument for the country’s intractable inflation problem.
Orthodox monetary policy works well when inflation is demand-driven. Higher interest rates discourage borrowing, reduce consumption and investment, slow money supply growth and eventually moderate prices.
Nigeria’s inflation, however, is driven largely by structural cost pressures.
Inadequate domestic production, high finance costs, high energy costs, insecurity, weak transport infrastructure, imported inflation, expensive logistics have all combined to push up the cost of virtually every good and service.
High MPR and high bank interest rates do not generate electricity. They do not repair highways. They do not improve security. They do not reduce logistics costs. Nor do they increase agricultural productivity or expand domestic manufacturing capacity.
When inflation originates largely from the supply side, monetary tightening can only achieve limited results while imposing significant costs on the productive economy.
There comes a point at which high interest rates themselves become inflationary!
Manufacturers depend on credit to finance machinery, working capital, inventories and expansion. When borrowing costs rise from about 18% to more than 32%, finance costs become an increasingly significant component of production costs.
Those higher costs are inevitably passed on to consumers through higher prices.
The result is a self-reinforcing cycle:
Higher interest rates → Higher production costs
→ Higher selling prices → Persistent inflation.
Even more damaging is the impact on investment. Few manufacturing projects consistently generate returns exceeding 30%.
Agriculture, mining, housing, logistics and industrial infrastructure generally yield even lower returns over the medium to long term.
Consequently, many economically desirable projects simply never proceed—not because they lack commercial merit, but because the cost of capital has made them financially impossible.
An economy cannot industrialise when the price of money consistently exceeds the expected return on productive investment.
Monetary Stability Is Necessary—But It Is Not Sufficient
None of this diminishes the importance of the Central Bank’s mandate. The CBN must preserve price stability, support confidence in the naira and maintain financial system stability. Higher interest rates do as a matter of fact attract foreign portfolio investment and help to moderate inflation expectations. These are legitimate and important objectives.
However, macroeconomic stability should be viewed as the foundation of economic development —not its destination. The ultimate purpose of monetary stability is to create an environment in which businesses invest, factories expand, exports increase, jobs are created and household incomes rise. If stability is achieved at the expense of sustained productive investment, policy has solved one problem while creating another.
The Missing Dimension: Productive Credit
The debate therefore should not be whether interest rates should be high or low.
The more important question is: How do productive sectors continue to receive affordable long-term finance while monetary policy remains appropriately tight?
This is where many successful emerging economies differ from Nigeria.
Rather than relying largely on commercial banks to finance industrial development, they deliberately channel long-term concessionary finance into sectors capable of transforming their economies.
Commercial banks are designed to manage liquidity, minimise risk and maximise shareholder returns. Industrial development on the other hand requires patient capital. The two perform different functions.
Expecting commercial banks charging market rates of over 30% to finance long-term industrialisation is inconsistent with both banking economics and economic history.
Egypt Demonstrates that Stabilisation and Growth Can Coexist
Egypt provides one of the most instructive contemporary examples. Like Nigeria, Egypt has experienced severe inflationary pressures and has maintained high policy interest rates during periods of macroeconomic adjustment.
Yet Egypt has continued to expand its manufacturing capacity, attract investment and implement one of Africa’s largest infrastructure programmes, including new industrial cities, logistics corridors, ports, highways and power projects.
This apparent contradiction is explained by one crucial policy distinction: Egypt did not rely solely on restrictive monetary policy. It complemented monetary tightening with an active industrial strategy supported by targeted development finance and massive infrastructure investment.
Priority sectors continued to receive affordable long-term financing through specialised institutions and government-supported credit programmes even while commercial interest rates remained elevated.
Consequently, macroeconomic stabilisation and industrial expansion proceeded together.
The lesson is clear. High policy rates need not prevent industrial expansion — provided the government deliberately create mechanisms that channel affordable long-term capital into productive investment. No country industrialised principally on commercial bank credit. History is remarkably consistent.on that.
Britain’s industrial revolution was supported by specialised merchant banking and capital markets.
Germany relied heavily on development banking.
Japan’s post-war industrial transformation was financed through close coordination between government, industry and financial institutions.
South Korea directed concessionary credit into carefully selected strategic industries.
China continues to combine market finance with powerful state-backed development banks.
More recently, Egypt has shown that even under conditions of high policy interest rates, governments can sustain industrial expansion through coordinated infrastructure investment and targeted development finance.
No major industrial economy relied mainly on commercial bank lending to finance its transformation. Nigeria should not expect to become the first.
Nigeria Needs a New Industrial Finance Architecture
Nigeria already has development finance institutions, including the Bank of Industry, Bank of Agriculture, Development Bank, etc.
However, their collective capital base remains far below what is required to transform Africa’s largest economy. Expanding the capital base of existing DFIs should therefore become a national priority.
Equally important is the establishment of new specialised DFIs dedicated to strategic sectors such as: Agro-processing;
Petrochemicals; Steel; Automotive manufacturing; Pharmaceuticals;
Machinery and capital goods; Mining and mineral processing; Renewable energy; Export manufacturing; Digital technology.
Each institution should combine technical expertise with long-term concessionary finance linked to measurable outcomes such as investment, employment, exports, technology transfer and local value addition.
These institutions should complement — not compete with —commercial banks. Their purpose would be to finance projects whose long-term economic benefits substantially exceed the returns that commercial lenders can reasonably support.
Without abundant patient capital, industrial transformation will remain slow regardless of monetary policy.
The Missing Ingredient is Policy Coordination
Perhaps the greatest weakness in Nigeria’s economic management is that monetary policy, fiscal policy and industrial policy often operate independently.
Economic transformation requires a unified national strategy.
- The Central Bank of Nigeria should continue to focus on monetary stability.
- The Federal Ministry of Finance should ensure fiscal sustainability.
- The Federal Ministry of Industry, Trade and Investment should lead industrial development. The Federal Ministry of Budget and Economic Planning should align infrastructure priorities with national productivity objectives.
- Development finance institutions should provide affordable long-term capital.
- The private sector should supply entrepreneurship, innovation and execution. These institutions should not work in parallel. They should all work together.
- The government should therefore consider the establishment of a National Development Finance Council, chaired by the President or Vice President and comprising the Ministers of Finance; Industry, Trade and Investment; Budget and Economic Planning, the Central Bank Governor, the heads of major development finance institutions, and representatives of manufacturers, exporters and organised labour. Its mandate should be to approve national priority industries, coordinate infrastructure investment, mobilise concessionary finance and measure progress against clearly defined national targets for investment, exports, employment, productivity and local value addition. Industrial policy should become a coordinated national programme rather than a collection of disconnected initiatives.
Imagine what mobilising say $20b annually for 5 years from local & international sources into productive sectors would do for the Nigerian economy.
Growth Must Outpace Population
Nigeria adds over 4 millon people to its
population every year. Unless GDP grows substantially faster than population, unemployment, poverty and declining living standards will remain inevitable.
This requires unprecedented levels of productive investment.
Affordable long-term finance is therefore not merely another economic policy. It is national infrastructure every bit as important as highways, railways and power stations.
A New Policy Consensus
Nigeria should not abandon monetary discipline. Nor should it tolerate high inflation.
But neither should it expect monetary policy alone to deliver industrialisation, create jobs and reduce poverty.
The Central Bank cannot finance long-term manufacturing expansion through commercial banking channels alone. Those responsibilities belong to a broader national development strategy.
The experience of successful industrial economies demonstrates that macroeconomic stability and industrial expansion are complementary — not competing — objectives.
Nigeria must therefore move beyond a policy framework centred almost exclusively on interest rates and embrace one that places equal emphasis on production, productivity and long-term investment.
History offers a simple lesson.
Nations become prosperous not because capital is scarce and expensive, but because productive investment is abundant, affordable and intelligently directed.
For Nigeria, the challenge is no longer deciding whether to fight inflation or pursue growth. The challenge is building the institutions capable of achieving both simultaneously.
That is the policy shift whose time has come.
**Akugbe Michael Ozigbo is the Managing Director of Paradigm Hostels Ltd, a purpose-built student accommodation PBSA development and management company in Lagos. He can be reached at: ozigbo@paradigmhostelsltd.com
