The cost of capital is becoming Nigeria’s growth problem

For much of the past three years, Nigeria’s economic debate has revolved around inflation, exchange rates, fuel subsidy removal, and the difficult reforms introduced to stabilise the economy. Those issues remain important because inflation remains elevated at 15.69 per cent while the naira continues to search for equilibrium. Households and businesses are still adjusting to […]

For much of the past three years, Nigeria’s economic debate has revolved around inflation, exchange rates, fuel subsidy removal, and the difficult reforms introduced to stabilise the economy. Those issues remain important because inflation remains elevated at 15.69 per cent while the naira continues to search for equilibrium. Households and businesses are still adjusting to a more market-driven economic environment.

Yet beneath these familiar concerns, another challenge is emerging—one that may ultimately determine whether Nigeria’s recent economic gains translate into sustained growth. The challenge is the cost of capital.

The Nigerian economy grew by 3.89 per cent in the first quarter of 2026, its strongest performance in several quarters. Capital importation has recovered sharply. The foreign exchange market is more orderly than it was two years ago. Investor confidence has improved. Indeed, by several measures, the economy appears more stable than it did at the height of the post-reform turbulence.

But stability alone does not generate prosperity. There is a certain rhythm that an economy must maintain for stability to endure. Businesses must invest. Factories must expand. Entrepreneurs must borrow, innovate, and create jobs. Infrastructure must be financed. New industries must emerge.

All these activities depend on one critical ingredient: affordable capital. Today, that ingredient is becoming increasingly expensive, and the consequences are becoming evident. Recall that the Central Bank of Nigeria pursued an aggressive monetary tightening cycle that pushed interest rates to levels unseen in recent years. Treasury bill yields have remained attractive as part of that stance. Government securities now offer returns that many investors find difficult to ignore.

The logic behind this policy is understandable. Nigeria has spent much of the last three years battling inflationary pressures triggered by subsidy removal, exchange-rate adjustments, rising energy costs, and structural supply constraints. Higher interest rates help absorb excess liquidity, support the naira, encourage savings, and reinforce confidence in monetary policy.

In many respects, the strategy has worked. Inflationary pressures have moderated from their peaks. Foreign portfolio investors have returned to Nigerian financial markets and now account for a significant share of capital inflows into the country. The exchange rate has become less volatile. The economy appears more predictable than it did during the period of severe macroeconomic uncertainty.

By any standard, these are significant achievements within a relatively short period. However, every economic policy involves trade-offs, and some of those trade-offs are now emerging as important challenges for the economy.

In this case, the same interest rates that attracted financial investors and helped curb inflationary pressures have also raised borrowing costs for businesses. With the CBN’s Monetary Policy Rate at 26.5 per cent, just one percentage point below its peak, the cost of capital has become a growing constraint on economic activity.

For large corporations, higher rates increase the cost of financing expansion plans. For small and medium-sized enterprises, they make formal credit almost inaccessible. For manufacturers, they raise working-capital costs at a time when energy, logistics, and input expenses are already elevated.

The result is that many investment decisions are being postponed because the economics have changed. Projects that appeared commercially viable when borrowing costs were lower may no longer generate sufficient returns to justify the risk. Consequently, expansion plans are delayed, equipment purchases deferred, and hiring slowed.

The significance of such decisions may not be immediately obvious. Consider a manufacturer planning a N10 billion expansion. At moderate borrowing costs, the investment may generate acceptable returns. But at significantly higher financing costs, the same project may be delayed or abandoned altogether. Across hundreds of firms, such decisions can influence the trajectory of the entire economy.

This is not merely a business problem; it is a growth problem. Economic growth ultimately depends on productivity and investment. Countries become richer not because money circulates faster but because businesses invest in new capacity, workers become more productive, and capital is allocated toward activities that generate future income. Anything that disrupts this cycle becomes a threat to growth.

When capital becomes excessively expensive, investment slows. The danger is not that economic activity stops altogether. The danger is that growth becomes increasingly dependent on consumption, government spending, or short-term financial flows rather than productive private-sector investment. Yet consumption itself has been weakened by the loss of purchasing power resulting from many of the factors already mentioned. Consumers’ spending capacity has been eroded by the combined effects of currency depreciation and high inflation.

This concern becomes even more relevant when viewed through the lens of Nigeria’s recent capital inflows. The country has witnessed a significant recovery in foreign capital inflows. Much of this improvement, however, has been driven by portfolio investment seeking attractive yields in financial markets. Foreign direct investment, the type of investment that builds factories, creates jobs, transfers technology, and commits capital for the long term, remains comparatively weak.

This distinction matters because not all capital contributes equally to long-term growth. Portfolio investors can provide liquidity and support financial markets, but they can also leave as quickly as they arrive. Sustainable economic transformation depends more heavily on long-term investment that expands productive capacity, creates employment, and strengthens competitiveness. The question, therefore, is whether Nigeria’s current policy mix is encouraging the kind of capital that builds the economy of the future.

Nigeria has spent three years fighting for stability. The next challenge is ensuring that the price of stability does not become a barrier to growth.