The World Bank has faulted the Central Bank of Nigeria’s (CBN) Open Market Operations (OMO) policy, calling for adjustments to enhance its effectiveness.
This was highlighted in the World Bank’s Nigeria Development Update, tagged “Building Momentum for Inclusive Growth” report, published earlier in the week.
According to the World Bank, there is scope for further improvements in monetary policy transmission.
The report comes amid a period of hawkish monetary policy by Nigeria’s central bank, which has maintained elevated interest rates in a bid to curb inflation and stabilize the economy.
This statement stands out as a rare critique from the World Bank, which has mostly commended the CBN for its bold approach to economic policy.
What the World Bank is saying
According to the World Bank, Nigeria’s short-term interbank rates fluctuate between the Standard Deposit Facility (SDF) and the Standard Lending Facility (SLF), rather than aligning with the Monetary Policy Rate (MPR).
Currently, Nigeria’s MPR stands at 27.5%, while banks can earn 26.5% by depositing with the CBN through the SDF, and are charged 32.5% when borrowing via the SLF.
The World Bank noted this as a sign of liquidity management constraints, stating that interbank rates should be “broadly stable around the MPR.”
It also recommended shortening OMO maturities and limiting participation to domestic investors.
The CBN currently uses OMO not just for liquidity control but also as a foreign exchange stabilization tool by exchanging OMO bills for U.S. dollars.
Recommendations
The World Bank reiterated that shortening OMO maturities and restricting access to domestic investors could increase the effectiveness of the instrument in mopping up excess naira liquidity in the short term.
According to the report:
- “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.”
Manufacturers in Nigeria have long complained about limited access to credit and the high cost of borrowing. The report echoes these concerns and suggests reforms to improve credit conditions.
- Additionally, the World Bank recommended the removal of restrictions that prevent banks from accessing the SLF when engaged in other CBN transactions. It also advised bringing the SLF rate closer to the MPR to help stabilize short-term interest rates.
Over time, as inflation declines, the World Bank urged a reassessment of the Cash Reserve Ratio (CRR) as a monetary policy tool. Instead, it suggested using the CRR as a prudential tool, similar to practices in most countries, to support greater financial intermediation and more efficient resource allocation.
What’s next?
The CBN’s Monetary Policy Committee (MPC) is scheduled to meet on Monday, May 19, to deliberate on the direction of monetary policy.
- The central bank has maintained the MPR at 27.5% since November 2024 and is widely expected to continue with its hawkish stance.
- The CBN has consistently cited high inflation as a key reason for maintaining elevated rates.
However, despite these measures, the money supply has continued to rise. As of March 2025, broad money supply stood at N114.2 trillion, up from N92.3 trillion a year earlier.
The World Bank’s report is expected to attract the attention of the CBN ahead of the policy meeting.
