eNaira and Monetary Policy Transmission in Nigeria: VAR Analysis
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Abstract
About This Research Topic
Central bank digital currencies are moving from theoretical models to live monetary experiments, and Nigeria's eNaira offers the longest operational track record in Africa. Launched in October 2021 by the Central Bank of Nigeria, the eNaira was positioned not only as a financial inclusion tool but as a mechanism to deepen the formal payments system through which monetary policy operates. This article investigates whether that promise is materializing.
In economies where cash dominance and shallow intermediation dilute policy signals, the interest rate channel often delivers slow and incomplete pass-through from the policy rate to retail lending rates. Nigeria has exemplified this pattern for two decades. The eNaira introduces a different layer of intervention – the payment infrastructure itself – potentially giving the central bank more direct visibility and influence over transaction flows.
This study uses monthly data from April 2021 to June 2026 and a parsimonious Vector Autoregression comprising the Monetary Policy Rate, eNaira transaction volume, interbank call rate, average lending rate, and headline inflation. Impulse responses, forecast error variance decomposition, Granger causality, and Chow break tests around the July 2022 USSD integration provide a comprehensive assessment of whether CBDC adoption is associated with stronger monetary transmission. For readers new to monetary frameworks, our guide to monetary policy instruments explains the conventional channels before CBDC effects are layered in.
Main Abstract
This article examines whether central bank digital currencies can reshape monetary policy transmission, with evidence from Nigeria's eNaira from October 2021 to June 2026. Using monthly national-level data, we estimate a five-variable Vector Autoregression (VAR) that includes the Monetary Policy Rate (MPR), eNaira transaction volume, interbank call rate, deposit money bank average lending rate, and headline inflation. The framework allows us to evaluate the dynamic interaction between CBDC usage and the interest rate channel. We compute impulse response functions to trace how lending rates and inflation react to policy rate shocks when eNaira volume is included, and we use forecast error variance decomposition to quantify the relative contribution of CBDC usage to fluctuations in lending rates. Granger causality tests assess directional linkages, while a Chow structural break test examines whether pass-through strengthened after the July 2022 integration of USSD access for feature phones, which expanded eNaira reach beyond smartphone users. Findings show that eNaira transaction volume Granger-causes movements in the interbank rate and, more modestly, retail lending rates. The estimated pass-through from MPR to lending rates is stronger in the post-USSD period than in the initial post-launch window. Variance decomposition, robust to alternative Cholesky orderings, indicates that eNaira volume explains a growing yet secondary share of lending rate variability compared to the policy rate itself. The evidence suggests CBDCs possess genuine but design-contingent potential to enhance transmission in developing economies, with accessibility, interoperability, and usability as key mediators.
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Background to the Study
Monetary policy effectiveness hinges on transmission – the process by which central bank actions alter financial conditions, credit availability, and ultimately aggregate demand and inflation. In advanced economies with deep financial markets, this process is relatively fluid. In Nigeria and many low- and middle-income economies, transmission is impeded by structural factors: high informality, dominance of cash, fragmented banking, and oligopolistic pricing in retail credit markets.
Empirical work on Nigeria consistently reports incomplete and asymmetric interest rate pass-through. Changes in the Monetary Policy Rate translate slowly into deposit and lending rates, weakening the Central Bank of Nigeria's ability to steer economic activity through conventional tools such as open market operations and standing facilities. Reforms to the interbank market and prudential guidance have improved liquidity management but have not fully resolved the underlying reach problem – a large share of transactions remains outside the formal, centrally observable system.
The eNaira, launched on 25 October 2021, represents Africa's first CBDC and one of the earliest live retail CBDCs globally. As a direct liability of the CBN denominated in naira, it differs from commercial bank deposits and private crypto assets. Its stated goals included lowering transaction costs, advancing financial inclusion, and strengthening monetary policy transmission by expanding the formal digital payments footprint. In its current non-remunerated form, it does not yet pay interest directly linked to the policy rate, but even without remuneration, wider adoption can improve transmission by increasing the proportion of economic activity settled in central bank money and by generating real-time data for policy calibration.
A decisive infrastructural shift occurred in July 2022 with USSD channel integration. The initial app-only design excluded feature-phone users who lack smartphones or reliable internet – a substantial segment in rural and low-income Nigeria. USSD access via short codes removed this barrier, creating a natural, dateable break point to test whether accessibility materially changes the CBDC-transmission relationship. This perspective aligns with research on digital financial inclusion, which shows that last-mile access determines usage beyond mere availability. The Bank for International Settlements has documented that CBDC design choices around access and interoperability are central to achieving policy objectives, a point echoed in our discussion of financial inclusion strategies for developing economies.
The policy stakes are high. Continued investment in eNaira infrastructure, merchant onboarding, and potential programmability features must compete with alternative uses of public resources. Without empirical evaluation of whether and under what conditions CBDC adoption strengthens transmission, policy calibration risks being speculative.
Statement of the Problem
Despite its explicit monetary policy objective, eNaira adoption has been modest relative to early projections, and rigorous econometric assessment of its transmission effects remains limited. Much existing commentary is descriptive, conceptual, or based on simulation rather than observed Nigerian data spanning multiple years of operation. Policymakers therefore lack clear evidence on three linked questions: whether eNaira transaction activity is systematically associated with improved interest rate pass-through, whether specific accessibility investments such as USSD integration coincide with measurable strengthening of that relationship, and how large the CBDC contribution is relative to the policy rate itself in explaining lending rate dynamics. This study addresses these gaps using a VAR framework covering April 2021 to June 2026, explicitly testing for a structural break around USSD integration and comparing it with an alternative October 2023 interoperability enhancement to verify specificity.
Aim and Objectives
The aim of this study is to assess how central bank digital currencies could reshape monetary policy transmission, using the eNaira experience in Nigeria as an empirical case.
1. Examine the trend in eNaira adoption, proxied by monthly transaction volume, from October 2021 to June 2026.
2. Assess the evolution of interest rate pass-through from the Monetary Policy Rate to interbank and retail lending rates over the study period.
3. Determine the dynamic response of lending rates and inflation to monetary policy shocks within a VAR system that incorporates eNaira transaction volume.
4. Investigate the Granger-causal links between eNaira usage and interest rate pass-through indicators.
5. Test for a structural break in the pass-through relationship around July 2022 USSD integration and confirm its specificity against an alternative break date.
6. Derive actionable implications for CBDC design, accessibility, and rollout sequencing as monetary policy instruments.
Research Questions
What has been the trend in eNaira transaction volume since launch in October 2021?
How has interest rate pass-through from the Monetary Policy Rate to retail lending rates evolved between 2021 and 2026?
How do lending rates and inflation respond dynamically to policy rate shocks when eNaira transaction volume is included as a transmission channel?
Does eNaira adoption Granger-cause changes in interbank and lending rates?
Does the pass-through relationship exhibit a significant structural break coinciding with the 2022 USSD channel integration?
Significance of the Study
This research provides direct evidence for the Central Bank of Nigeria's Monetary Policy Committee and eNaira team on whether CBDC infrastructure yields a monetary policy dividend. By isolating the USSD milestone, it informs prioritization between smartphone-app enhancements, feature-phone accessibility, merchant interoperability, and future programmability.
For the broader research community, the study contributes one of the first multi-year empirical assessments of a live retail CBDC in a developing economy, moving beyond calibration exercises. Central banks across Africa, including several ECOWAS members observing the eNaira as a reference model, can draw lessons on which design choices – particularly accessibility for non-smartphone users – appear associated with measurable transmission gains.
Students and researchers working on monetary economics will find the framework instructive for replicating CBDC-transmission tests in other contexts. Our collection of economics project topics provides comparable templates for structuring VAR-based monetary studies, while the methodological approach here demonstrates how to embed a new payment technology variable within a conventional transmission model without over-parameterization.
Scope of the Study
The study uses monthly national-level Nigerian data from April 2021 to June 2026, providing a short pre-launch baseline and nearly five years of post-launch observation. It focuses on the interest rate channel of monetary policy transmission. Credit and exchange rate channels are acknowledged but not separately modeled. The structural break analysis compares sub-periods split at July 2022 USSD integration, tested against October 2023 interoperability enhancement as an alternative candidate to establish specificity. The VAR is intentionally parsimonious to preserve degrees of freedom given the relatively short CBDC history.
Operational Definition of Terms
Central Bank Digital Currency (CBDC): A digital form of sovereign currency, denominated in the national unit of account, constituting a direct liability of the central bank. Unlike commercial bank money or crypto assets, it is legal tender in digital form. See the Federal Reserve's explainer on CBDC design principles.
Monetary Policy Transmission: The mechanism through which central bank policy decisions, particularly changes in the policy rate, affect money market rates, bank lending rates, credit conditions, aggregate demand, and inflation. The IMF provides an overview of transmission channels in low-income economies.
Interest Rate Pass-Through: The degree and speed with which policy rate adjustments are reflected in market and retail rates. Complete pass-through implies one-for-one movement; incomplete or sluggish pass-through indicates frictions.
eNaira Transaction Volume: Monthly value of transactions settled on the eNaira platform, used as a proxy for CBDC adoption depth. It captures usage intensity, though not wallet counts or use-case diversity.
Vector Autoregression (VAR): A system of equations where each variable is modeled as a linear function of its own lags and lags of all other variables, useful for capturing dynamic interdependencies without strong a priori exogeneity assumptions.
USSD Channel Integration: The July 2022 extension allowing eNaira access via Unstructured Supplementary Service Data on feature phones, eliminating smartphone and internet requirements.
Structural Break: A statistically significant shift in model parameters at a specific date, tested via Chow test. Indicates that relationships differ across sub-periods, potentially due to policy or infrastructural change.
External references:
Federal Reserve – What is a CBDC?
IMF – CBDCs and Monetary Policy Transmission (2023)
BIS – Central Bank Digital Currencies Research
Short Conclusion
Evidence from April 2021 to June 2026 suggests the eNaira has not yet transformed monetary policy transmission in Nigeria, but it has begun to modestly strengthen it under specific accessibility conditions. Transaction volume Granger-causes interbank rate movements and is associated with higher pass-through after USSD integration, yet its contribution to lending rate variance remains secondary to the policy rate itself. The implication is that CBDCs are not automatically transmission-enhancing; their impact is mediated by design choices that determine who can actually use them. Deepening interoperability with bank accounts and mobile money, ensuring reliable USSD performance, and piloting targeted, non-distortionary programmability could amplify the dividend. Future research should extend to credit and exchange rate channels and exploit more granular wallet-level data. For more empirical approaches to digital finance, see our guides on research methodology for economics projects.
Frequently Asked Questions
Q: What is the eNaira and when was it launched?
A: The eNaira is Nigeria's retail central bank digital currency, a digital liability of the Central Bank of Nigeria denominated in naira. It was launched on 25 October 2021 as Africa's first live retail CBDC.
Q: Can CBDCs really improve monetary policy transmission?
A: Theoretically yes, by expanding the share of transactions in central bank money, improving data visibility, and potentially allowing direct remuneration. Empirically, the effect depends on adoption depth and accessibility, as shown by stronger pass-through after USSD integration in Nigeria.
Q: What methodology was used to assess eNaira's impact?
A: A five-variable Vector Autoregression using monthly data (April 2021–June 2026) comprising MPR, eNaira transaction volume, interbank call rate, average lending rate, and inflation, with impulse responses, variance decomposition, Granger causality, and Chow break tests.
Q: What is interest rate pass-through in this context?
A: It measures how much and how quickly a change in the Central Bank's Monetary Policy Rate is reflected in commercial bank lending rates faced by households and firms.
Q: Why is July 2022 USSD integration important?
A: It extended eNaira access to feature-phone users without smartphones or internet, substantially broadening potential reach in rural and low-income segments previously excluded by the app-only design.
Q: Did eNaira volume Granger-cause lending rates?
A: The study finds Granger causality from eNaira volume to the interbank call rate and, to a lesser extent, to retail lending rates, indicating predictive content rather than definitive causal proof.
Q: How much of lending rate variation does eNaira explain?
A: Variance decomposition shows eNaira volume explains a rising but still secondary share of forecast error variance in lending rates compared to the policy rate itself, robust to Cholesky ordering changes.
Q: Was there a structural break in transmission?
A: Yes, the Chow test indicates a significant break around July 2022 USSD integration, with higher pass-through post-break than pre-break, and this date outperforms October 2023 interoperability as an alternative break candidate.
Q: What are the policy implications for other African central banks?
A: Design for accessibility first – feature-phone channels, merchant interoperability, and low transaction costs – appears critical for CBDCs to deliver monetary policy benefits in contexts with limited smartphone penetration.
Q: What are the limitations of this study?
A: Short post-launch sample, use of transaction volume as sole adoption proxy, limited pre-USSD observations, single-country design, and focus only on the interest rate channel, not credit or exchange rate channels.
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