The CBN Is the Thermometer. Here Is the Fever

Nigeria's persistent high interest rates are not primarily the fault of the Central Bank of Nigeria (CBN) Governor Cardoso, but rather a reflection of the nation's low level of formal savings, according to finance commentator Kemi Adeosun.

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If Nigeria wants lower interest rates, we need to stop looking at the CBN Governor Cardoso, with the greatest of respect, it is not you.

Adeosun explains that interest rates are fundamentally determined by the supply and demand for money. The supply of loanable funds originates from savings formally deposited within the financial system, such as bank accounts and pension funds. This aggregate amount, known as broad money, is a critical determinant of borrowing costs.

She highlights that to achieve lower interest rates, countries require both a substantial broad money supply relative to their Gross Domestic Product (GDP) and low inflation. Adeosun contrasts Nigeria's situation with other countries, presenting data that shows a clear correlation between a larger formal savings pool and cheaper money.

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The thermometer did not cause the fever. It is reporting it.

Nigeria's broad money stands at 30% of GDP, with an inflation rate of 16% and a benchmark rate of 26.5%. This is significantly lower than South Africa (74% broad money, 3.2% inflation, 6.75% benchmark rate) and the United Kingdom (144% broad money, 2.8% inflation, 3.75% benchmark rate), illustrating the impact of savings depth on interest rates.

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When the supply of money available to lend is large, the price of borrowing falls. When the supply is thin, the price rises.