January 3, 2025/CSL Research
In 2024, Nigeria faced a significant liquidity crunch in its money market, posing substantial challenges for financial institutions, businesses, and the broader economy. According to the Central Bank of Nigeria’s (CBN) Q3 2024 Economic Report, this liquidity shortfall was driven by a combination of monetary tightening, fiscal pressures, and broader macroeconomic challenges. These factors collectively strained fund availability, leading to increased borrowing costs and constrained economic activities. The liquidity crisis was primarily attributed to the CBN’s aggressive monetary policy aimed at combating inflation. Following the removal of fuel subsidies and the devaluation of the naira, inflation surged, prompting the CBN to raise its Monetary Policy Rate (MPR) six times in 2024, by a total of 875 basis points to 27.5%. While this decisive action was necessary to curb inflationary pressures, it resulted in tightening the money supply. Banks and other financial institutions struggled to access short-term funds, creating
ripple effects across the financial system.
The Federal Government’s fiscal policies further exacerbated the liquidity challenges. Fiscal tightening measures focused on debt servicing and capital projects, reduced the flow of funds into the banking sector. Additionally, the government’s heavy reliance on domestic borrowing to finance its fiscal deficit crowded out private sector participants, intensifying the liquidity crunch. Financial institutions faced fierce competition for limited funds, pushing interbank lending rates to record highs. By Q3 2024, the Open Buy Back (OBB) and Overnight (OVN) rates had risen to 27.3% and 27.8%, respectively.
Compounding the situation were the CBN’s Open Market Operations (OMO) which drained liquidity from the financial system. Small and medium-sized enterprises (SMEs), in particular, bore the brunt of these conditions, as reduced access to credit hindered their ability to sustain operations and contribute to economic growth.
The liquidity crisis also reverberated through Nigeria’s capital markets. With banks prioritizing liquidity management, participation in bond and equity markets dwindled. Investors sought safer, short-term instruments like treasury bills, leading to reduced activity in the broader capital markets. In a bid to alleviate the liquidity crisis, the CBN implemented measures such as targeted sector interventions while also being a lender of last resort to banks who became highly reliant on the Standing Lending Facility (SLF) window of the Apex bank to meet short term liquidity obligations.
Bank borrowings from the CBN at the SLF window at the close of Q3 2024 was ₦27.95 trillion, up 691.8% y/y from ₦3.53 trillion in Q3 2023. While these efforts provided temporary relief, they underscored the need for long-term reforms to address structural issues in Nigeria’s financial system. The liquidity crunch in 2024 underscored the complex trade-offs involved in managing inflation and economic stability, highlighting the need for a balanced approach to monetary and fiscal policies.
