Nigeria Economy: Cautious Optimism Supports Gradual Monetary Easing – Standard Chartered Analysis

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Nigeria Economy: Cautious Optimism Supports Gradual Monetary Easing – Standard Chartered Analysis

LAGOS, Nigeria – March 2025: Standard Chartered’s latest economic assessment reveals Nigeria’s slowing inflation trajectory now supports cautious monetary easing, marking a potential turning point for Africa’s largest economy after years of restrictive policy measures. This analysis comes amid improving macroeconomic indicators and structural reforms that have gradually stabilized the nation’s financial landscape.

Nigeria’s Economic Trajectory Shows Measured Improvement

Recent data from Nigeria’s National Bureau of Statistics indicates a consistent decline in headline inflation for the fourth consecutive month. The consumer price index dropped to 28.2% in February 2025 from its peak of 31.7% in October 2024. This downward trend provides the Central Bank of Nigeria (CBN) with increased policy flexibility. Furthermore, foreign exchange reserves have stabilized above $35 billion, while the naira has maintained relative stability within a managed float system.

Standard Chartered economists highlight several contributing factors to this improved trajectory. Agricultural output recovery, particularly in staple crops, has eased food price pressures. Additionally, targeted fiscal interventions and improved crude oil production have bolstered government revenues. The banking sector’s resilience, demonstrated through recent stress tests, further supports the case for measured policy adjustments.

Monetary Policy Evolution and Current Context

The Central Bank of Nigeria maintained its Monetary Policy Rate at 24.75% throughout 2024, following aggressive tightening cycles that began in 2022. This restrictive stance aimed to combat inflation exceeding 30% while stabilizing the currency. However, the current economic landscape presents new considerations for policymakers.

Key indicators now suggest room for cautious easing:

• Inflation Momentum: Month-on-month inflation increases have slowed significantly
• Exchange Rate Stability: Reduced volatility in parallel market premiums
• Growth Considerations: GDP expansion remains below potential at 2.8%
• External Balances: Current account showing gradual improvement

Standard Chartered’s analysis emphasizes that any easing should proceed gradually, likely beginning with reduced Cash Reserve Requirements before potential rate adjustments. The bank’s economists project initial moves in the second quarter of 2025, contingent on sustained inflation moderation.

Expert Analysis and Regional Comparisons

Standard Chartered’s Africa economist, Razia Khan, notes that “Nigeria’s policy normalization path mirrors emerging market trends but requires unique calibration.” She references similar transitions in Ghana and Kenya, where central banks initiated cautious easing cycles after inflation peaked. However, Nigeria’s larger informal economy and specific structural challenges necessitate particular caution.

The table below compares key economic indicators across major African economies:

Country	Current Inflation	Policy Rate	GDP Growth 2024
Nigeria	28.2%	24.75%	2.8%
Ghana	22.5%	29.0%	3.1%
Kenya	6.3%	13.0%	5.2%
South Africa	5.1%	8.25%	1.3%

Structural Reforms and Their Economic Impact

President Bola Tinubu’s administration implemented several significant reforms since mid-2023 that now influence monetary policy considerations. The removal of fuel subsidies, though initially inflationary, has reduced fiscal pressures. Similarly, exchange rate unification, despite short-term volatility, has improved transparency in foreign exchange markets.

These structural changes have altered Nigeria’s economic fundamentals. The Petroleum Industry Act implementation has increased oil sector investment, while electricity sector reforms aim to improve power generation. Consequently, manufacturing capacity utilization has shown modest improvement, rising from 45% to 52% over the past year.

Standard Chartered’s report highlights that these reforms create conditions for sustainable growth. However, the bank cautions that benefits will materialize gradually. Social safety net expansions have partially mitigated reform impacts on vulnerable populations, maintaining social stability crucial for continued implementation.

Global Context and External Factors

International developments significantly influence Nigeria’s policy options. The Federal Reserve’s monetary policy trajectory affects capital flows to emerging markets. Additionally, global oil price fluctuations directly impact Nigeria’s primary revenue source. China’s economic recovery pace also affects demand for Nigerian exports.

Recent OPEC+ production adjustments have supported oil prices around $85 per barrel, benefiting Nigeria’s fiscal position. Meanwhile, improved relations with international financial institutions have facilitated technical assistance and potential financing arrangements. The World Bank’s recent $2.5 billion development policy financing supports Nigeria’s reform agenda.

Standard Chartered emphasizes that external conditions currently favor cautious easing. Global inflation moderation reduces imported price pressures, while relatively stable commodity prices provide revenue predictability. However, geopolitical risks in oil-producing regions require continuous monitoring.

Banking Sector Resilience and Credit Conditions

Nigeria’s banking system has demonstrated remarkable resilience throughout the tightening cycle. Capital adequacy ratios remain above regulatory minimums at 15.3%, while non-performing loans have stabilized at 4.8%. This strength enables banks to support economic activity as conditions improve.

Credit growth to the private sector turned positive in January 2025 for the first time in eighteen months. This development suggests that monetary transmission mechanisms remain functional despite high rates. Standard Chartered notes that improved risk assessment frameworks and digital banking expansion have enhanced financial inclusion, supporting broader economic participation.

Conclusion

Nigeria’s economic trajectory now supports cautious monetary easing according to Standard Chartered’s comprehensive analysis. The slowing inflation momentum, combined with structural reforms and external stability, creates conditions for gradual policy normalization. However, the Central Bank of Nigeria must balance growth support with inflation containment, ensuring that any easing proceeds measuredly. The Nigeria economy stands at a potential inflection point, with careful policy calibration essential for sustaining recent gains while fostering inclusive growth.

FAQs

Q1: What specific indicators suggest Nigeria can begin monetary easing?
Multiple indicators support cautious easing: four consecutive months of declining inflation, stabilized exchange rates, improved foreign reserves above $35 billion, positive private sector credit growth, and reduced month-on-month inflation momentum.

Q2: How might the Central Bank of Nigeria implement initial easing measures?
The CBN will likely begin with operational adjustments rather than immediate rate cuts. Potential measures include reducing Cash Reserve Requirements for banks, adjusting Standing Deposit Facility rates, or modifying liquidity management operations before considering Monetary Policy Rate reductions.

Q3: What risks could derail Nigeria’s monetary easing trajectory?
Several risks persist: renewed exchange rate volatility, fiscal slippage ahead of 2027 elections, global oil price shocks, resurgence of domestic security challenges affecting agricultural output, or faster-than-expected Federal Reserve tightening affecting capital flows.

Q4: How does Nigeria’s situation compare to other African economies?
Nigeria’s inflation remains higher than peers like Kenya (6.3%) and South Africa (5.1%), necessitating more cautious easing. However, its improving trajectory resembles Ghana’s path in 2024, where gradual easing followed inflation peaks without triggering renewed price pressures.

Q5: What timeframe does Standard Chartered project for Nigeria’s policy normalization?
Standard Chartered anticipates initial easing measures in Q2 2025, with gradual progression throughout the year. The pace will depend on sustained inflation moderation, with the Monetary Policy Rate potentially decreasing by 200-300 basis points by year-end if current trends continue.

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