As Nigerian Inflation Soars To Historic Levels, Demand For Dollars Increases

 When inflation strikes your investments or savings in Nigeria, it doesn't spare any victims.

Almost all of the return on investment in short-term government bonds is lost due to the nation's headline inflation, which reached an 18-year high of 25.8 percent in August, and investors are even left with a negative real return. Even the longer-dated bonds are not particularly attractive due to long-term inflation predictions.

After a global increase in inflation that peaked last year, many nations are struggling to offer genuine returns on investment, but Nigeria stands out as a special example, at least in Africa, due to the enormous difference between inflation and interest rates.

A 13 percent yield on one-year Nigerian Treasury Bills offset by an August inflation rate of 25.8 percent results in a negative actual return on the one-year bill of 12.8 percent for the investor.

According to verified statistics gathered by BusinessDay, that represents the poorest return on paper of any one-year Treasury Bill across Africa.

Nigeria’s negative real return on the one-year T-Bill is worse than Egypt’s -11.9 percent and Ghana’s -10 percent, according to government treasury data.

A one-year T-bill yield of 8.57 percent and the nation's inflation rate of 4.8 percent result in a positive real return for South Africa of 3.77 percent.

Investors may not like the picture, but savers aren't any better off. The difference between the deposit rate in Nigeria, which reached an all-time high of 5.18 percent as of June 2023, and inflation is about 20 percent, making it the biggest difference in Africa.

In any nation, a disparity this large is a formula for poor savings since people tend to spend less on savings when interest rates are low.

In Nigeria, where interest rates remain unnaturally low, this is pressuring the naira, which has now crossed the 1,000/$ level, four years sooner than the Economist Intelligence Unit predicted, and driving Nigerians to dollar-based assets. On Thursday, a dollar went for N1,080 in the streets as demand for the dollars grows.

According to engineer Ayodeji Babatope, who claims he now saves in dollars, "it's as if no one wants anything to do with the naira." Even banks are profiting handsomely on currency bets.

In fact, Nigerian banks reported record earnings on currency revaluation gains after the naira's depreciation in June.

In the first half of 2023, the banks' biggest source of profit came from FX revaluation gains. For instance, Access Bank, the nation's largest bank by assets, saw revaluation gains of N340 billion in the first half of 2023. That was higher than the bank's net interest income for the same period, which was N232 billion.

“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 centre of attraction,” a banker who did not want to be quoted said.

T-Bill yields reached 18 percent in 2017, but the government quickly stopped the practise since it caused a sharp increase in the cost of the government's debt payment.

The government's reluctance to permit market-reflective interest rates continues to be greatly influenced by worries about the impact of high interest rates on a government that spent more than 90% of its income servicing creditors last year.

To battle inflation, the Central Bank of Nigeria (CBN) increased the monetary policy rate (MPR) over the past year to a record 18.5 percent, but it hasn't been able to bring it down to its desired objective of 6 to 9 percent or even close to it.

The authorities have long since broken the relationship between the MPR and the levels of general interest rates throughout the nation, which has led to a scenario where the MPR is not the reference or base rate it should be, with interest rates on the one-year T-Bill, for example, being lower than MPR.

Before foreign portfolio investors can be confident to re-engage with Nigeria, T-Bill yields may need to increase to re-establish the policy rate as the anchor for interest rates, according to Ayo Salami, chief investment officer of London-based Emerging Markets Investment Management Limited, which manages about $40 million in investments in Nigeria's bonds and stocks.

According to Salami, a "true willing buyer, willing seller foreign currency market" is also essential for luring investments back and easing pressure on the naira.

While some investors argue that hiking short-term interest rates is necessary to stop the nation's currency from becoming more and more in demand, the issue may be far more complex than that.

Without a question, it's a good place to start, but one foreign investor told BusinessDay that "it doesn't matter what the interest rates are if foreign investors can't take money out when they want."

A significant backlog in foreign exchange demand for Nigeria has discouraged a number of investors.

Olayemi Cardoso, the new governor of the Central Bank of Nigeria, is still to decide how to address the country's artificially low interest rates and how to entice foreign investment.