In Nigeria, the merciless grip of inflation shows no mercy to savings or investments. With headline inflation soaring to an 18-year high of 25.8 percent in August, it’s eroding nearly all returns on short-term government bonds, leaving investors with negative real returns. Even longer-dated bonds fail to offer an enticing alternative.
The global surge in inflation, peaking last year, has left many countries struggling to provide real returns on investments. However, Nigeria’s unique situation, with a vast chasm between inflation and interest rates, sets it apart in Africa.
Consider this: Yields of 13 percent on one-year Nigeria Treasury Bills against an inflation rate of 25.8 percent in August result in a staggering negative real return of 12.8 percent on the one-year bill.
This grim statistic makes Nigeria’s one-year Treasury Bill the worst performer in Africa, based on official data compiled by BusinessDay.
Nigeria’s negative real return on the one-year T-Bill surpasses Egypt’s -11.9 percent and Ghana’s -10 percent, as reported in government treasury data.
A banker, who wished to remain anonymous, noted, “When the yields on T-Bills were very high, the banks flocked to T-Bills, but with the high-yielding T-Bill era gone, the dollar is the new center of attraction.”
T-Bill yields reached as high as 18 percent in 2017, but the government curtailed this practice due to the rapid surge in its debt service costs.
Concerns about the impact of high interest rates on a government that spent over 90 percent of its revenues repaying creditors last year continue to influence the government’s reluctance to allow market-reflective interest rates.
The Central Bank of Nigeria (CBN) has raised the monetary policy rate (MPR) to a record 18.5 percent over the past year to combat inflation, but it has failed to bring it within the preferred target of 6-9 percent, or anywhere close, for that matter.
The disconnect between the MPR and general interest rate levels in the country has long been severed by the authorities. This has created a situation where the MPR no longer serves as the reference or base rate it should be, with the interest rate on the one-year T-Bill, for instance, lower than the MPR.
Ayo Salami, Chief Investment Officer of London-based Emerging Markets Investment Management Limited, commented, “T-Bill yields may need to rise to re-establish the policy rate as the anchor for interest rates before foreign portfolio investors can regain confidence in Nigeria.”
Salami also highlighted the importance of establishing a “genuine willing buyer, willing seller foreign currency market” to lure investments back and reduce pressure on the naira.
While some investors believe that short-term interest rates must rise to curb the growing demand for dollars, Nigeria’s challenges may run deeper than just raising rates. As one foreign investor aptly stated, “It’s a place to start, no doubt, but if foreign investors can’t take money out when they want it, it doesn’t matter what the interest rates are.”
Nigeria grapples with a significant FX demand backlog that has kept numerous investors on the sidelines.
The question remains unanswered: What will the new CBN governor, Olayemi Cardoso, do about artificially low interest rates and how to entice investments back into the country?
