The Central Bank of Nigeria’s (CBN) aggressive campaign of interest rate hikes throughout 2024 to combat soaring inflation has dramatically reshaped the country’s financial markets, driving a surge in investor demand for fixed income instruments. This shift, while successful in attracting capital, has had a significant economic side effect: crowding out private sector borrowing as government debt issuance became overwhelmingly dominant.
Kemi Awodein, the President of the Association of Issuing Houses of Nigeria (AIHN), highlighted these developments at the Association’s Annual General Meeting in Lagos. “The CBN relied heavily on the interest rate hike to tackle inflation,” she stated. The central bank raised its benchmark interest rate a remarkable eight times in 2024, culminating in a total increase of 875 basis points to reach 27.5 per cent by November, up from 18.75 per cent at the start of the year.
The immediate consequence was a rush by investors into government debt, which offered far more attractive returns. Awodein revealed the staggering scale of this activity: “Data indicate that about ₦12.83 trillion in OMO bills and Treasury Bills were sold, compared to ₦716.7 billion for the whole of 2023.” The high-interest environment, however, choked off corporate borrowing. “The private sector was essentially crowded out,” Awodein explained, noting that the bulk of new debt capital raising activity was concentrated in short-term Commercial Paper issuances, rather than long-term corporate bonds.
From a broader economic perspective, the CBN’s stringent monetary policy is a tightrope walk. While the rate hikes are intended to anchor inflation and stabilise the naira by attracting foreign exchange inflows, they come at the cost of slowing economic growth.
“The continued rise in the interest rate, though aimed to combat inflationary pressures and stabilise the economy, has far-reaching consequences on businesses,” said Samson G. Simon, a chief economist at ARKK Economics and Data Limited. He explained that a tightening monetary condition means credit is accessed at higher rates, which “discourages business expansion and fuels the already high unemployment rate.”
High lending rates, which for businesses can range from 35% to 40%, particularly constrain the real sector manufacturing and agriculture which must pay more to borrow, deterring the capital investment needed for growth. Adedotun Adesile, a US-based finance analyst, agreed, saying high lending rates “may lead to slower economic growth as it reduces business investment and expansion,” which invariably leads to “increased unemployment as businesses cut costs.”
Despite these challenges, the high-interest environment has made Nigerian fixed-income securities, like bonds and deposits, “more appealing” to investors, according to Adesile. This renewed investor confidence, coupled with anticipations of interest rate cuts in other international markets, led to increased capital inflows later in the year. A significant milestone was the successful issuance of Nigeria’s first domestic dollar bond by the Debt Management Office.
Another major market development in 2024 was the surge in equities capital raises within the investment banking sector, spurred by a CBN directive for bank recapitalisation announced in March. This mandate aims to bolster the financial stability of Nigerian banks to withstand external and domestic shocks, aligning the sector to support the government’s goal of achieving a $1 trillion economy by 2030.
The new minimum capital requirements, which include ₦500 billion for banks with international authorisation, have forced institutions to seek fresh capital. Awodein noted that significant transactions took place, with some institutions like Access Bank Plc already announcing the attainment of the new regulatory capital levels.
“The activity in the sector will continue in earnest in 2025 as the deadline of March 2026 approaches,” she projected. Other banks, including Fidelity Bank, GT Bank, FCMB, and Zenith Bank, also undertook issuances to meet these requirements.
In the corporate world, there were prominent capital-raising transactions, such as Seplat Energy’s $650 million bond issuance to expand energy operations and Airtel Africa’s $500 million capital raise for telecommunications infrastructure. The transition of Aradel Holdings Plc from the NASD OTC market to the Nigerian Exchange (NGX) was also a key highlight, providing investors with new opportunities and enhancing market liquidity.
In summary, 2024 was a year of profound restructuring for Nigeria’s financial system, driven by the CBN’s dual policies of aggressive monetary tightening and banking sector consolidation. The former boosted the government debt market at the expense of private sector credit, while the latter is setting the stage for a stronger, better-capitalised banking industry.
