The World Bank has taken a rare swipe at the Central Bank of Nigeria’s (CBN) monetary tightening strategy, specifically questioning the effectiveness of its Open Market Operations (OMO) framework.
In its latest Nigeria Development Update released this week, titled “Building Momentum for Inclusive Growth,” the global lender flagged several flaws in Nigeria’s monetary transmission mechanisms, urging urgent reforms to support credit expansion and improve liquidity management.
While the World Bank commended the CBN’s overall commitment to stabilizing the economy through tight monetary policy, it warned that certain tools, particularly the deployment of OMO, are undermining the broader goals of macroeconomic stability and credit availability.
Misalignment in Interest Rates
The World Bank’s report highlighted that Nigeria’s short-term interbank rates are floating between the central bank’s Standard Deposit Facility (SDF) and Standard Lending Facility (SLF) rather than aligning with the Monetary Policy Rate (MPR).
Currently, the MPR stands at 27.5%, but banks are able to earn 26.5% on deposits placed with the CBN through the SDF and are charged 32.5% when they borrow from the SLF. This disparity, according to the World Bank, points to an inefficient transmission of monetary policy and an inability to effectively steer interest rates across the financial system.
It indicated that interbank rates should be broadly stable around the MPR, calling the current trend a sign of liquidity management constraints within the Nigerian financial system.
Is The OMO for Liquidity Control or FX Tool?
OMO bills are traditionally used to control money supply in the banking sector, helping to mop up excess liquidity that could fuel inflation. But the World Bank expressed concern that the CBN is using OMO instruments not just for domestic liquidity control but also to manage foreign exchange (FX) volatility.
In recent months, the CBN has been exchanging OMO bills for U.S. dollars in a bid to stabilize the naira—a move the World Bank believes is distorting the purpose of monetary policy instruments.
As part of its recommendations, the Bank suggested:
- Shortening the maturities of OMO bills to make them more agile in mopping up short-term liquidity.
- Limiting OMO participation to domestic investors could reduce speculative carry trades and avoid the distortions caused by foreign capital flows.
The bank warned that restricting access to domestic investors could increase the effectiveness of the instrument in mopping up excess naira liquidity, adding that it could also help eliminate the segmentation of Nigeria’s yield curve, where CBN and Federal Government of Nigeria (FGN) securities of the same maturity attract different rates.
“It could also help channel longer-term lending to the private and public sectors, and eliminate the current segmentation of the yield curve between CBN and FGN securities of the same tenors,” the report said.
Manufacturers and Credit Access
Nigeria’s private sector, especially manufacturers, has long struggled under the burden of high interest rates and limited access to credit. The World Bank echoed these concerns, warning that the current monetary policy mix is strangling productive sectors and discouraging lending to small and medium enterprises (SMEs).
While inflation control remains a priority, the report stresses the need to recalibrate certain tools, such as the Cash Reserve Ratio (CRR), to free up credit. The World Bank advised that over time, the CRR should be redefined as a prudential tool rather than a blunt monetary instrument.
Call for SLF Reforms
The World Bank also called attention to existing restrictions on the Standard Lending Facility (SLF), which prevent banks from accessing it when they are engaged in other CBN transactions. It recommended to lift such restrictions and narrow the gap between the SLF and the MPR to bring greater stability to short-term interest rates.
The critique lands ahead of a key Monetary Policy Committee (MPC) meeting scheduled for Monday, May 19, where the CBN will deliberate on the direction of monetary policy. Since November 2024, the apex bank has maintained the benchmark interest rate at 27.5%, citing inflationary pressure as justification for its hawkish stance.
Despite these elevated rates, Nigeria’s money supply continues to expand rapidly. As of March 2025, broad money supply (M3) stood at N114.2 trillion, a sharp increase from N92.3 trillion recorded a year earlier. The rise in liquidity suggests that the CBN’s policy tightening has not translated into effective control of monetary aggregates.
The World Bank’s unusually blunt remarks are expected to draw serious attention within Nigeria’s monetary policy circles. While the CBN under Governor Olayemi Cardoso has won praise for its bold stance on inflation control, the latest data, and now, external criticism, suggest that monetary policy transmission remains deeply flawed.
If adopted, the World Bank’s recommendations could signal a shift toward a more calibrated, less rigid monetary framework. However, it is not certain whether the CBN will respond with reforms at the upcoming MPC meeting or continue to double down on its current policy approach.
For manufacturers, SMEs, and retail borrowers, any shift that results in better credit conditions would be welcome. But for now, the broader Nigerian economy remains caught between a rising money supply and a high-interest-rate environment—conditions that even multilateral lenders now admit are working at cross-purposes.
