Flight to dollars heightens as inflation dwarfs returns in Nigeria

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.

South Africa has a positive real return of 3.77 percent, which is the difference between a yield of 8.57 percent on one-year T-Bills and the country’s August inflation rate of 4.8 percent.

The picture may look bad for investors but it’s no better for savers. The deposit rate in Nigeria, which hit an all-time high of 5.18 percent as of June 2023, leaves a gap of around 20 percent when compared with inflation, also the widest gap in Africa.

Such a wide gap is a recipe for low savings in any country as people tend to save less when interest rates are low.

In Nigeria’s case, interest rates are artificially low and that’s pushing Nigerians to dollar-based investments, piling pressure on a fragile naira that has now crossed the 1,000/$ mark, four years earlier than the Economist Intelligence Unit called it. One dollar sold for N1,080 on the streets Thursday as the rush for the greenbacks intensifies.

“It’s as if no one wants anything to do with the naira,” Ayodeji Babatope, an engineer who says he now saves in dollars, told BusinessDay. “Even the banks are making a killing betting against the currency.”

Indeed, Nigerian banks booked record profits in foreign currency revaluation gains following the devaluation of the naira last June.

The FX revaluation gains were the single largest source of profit for the banks in the first six months of 2023. For instance, Access Bank, the country’s largest bank by assets, made N340 billion in revaluation gains in H1 2023. That exceeded the bank’s net interest income of N232 billion for the same period.

“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 went as high as 18 percent in 2017 but the government soon cut back on the practice as it led to a rapid surge in the government’s debt service costs.

Concerns over the impact of high interest rates on a government that spent over 90 percent of its revenues repaying creditors last year continues to weigh heavily on the government’s reluctance to allow market-reflective interest rates.

The Central Bank of Nigeria (CBN) has raised the monetary policy rate (MPR) over the last one year to a record 18.5 percent to combat inflation but has failed to get it within its preferred target of 6-9 percent or anywhere close for that matter.

The link between the MPR and general interest rate levels in the country has been long broken by the authorities and that has created a situation where the MPR is not the reference or base rate it should be with interest rate on the one-year T-Bill for instance lower than MPR.

“T-Bill yields may have to rise to re-establish the policy rate as the anchor for interest rates before foreign portfolio investors can be confident to re-engage with Nigeria,” Ayo Salami, chief investment officer of London-based Emerging Markets Investment Management Limited, which controls around $40 million in investment in Nigeria’s bonds and stocks.

“A genuine willing buyer, willing seller foreign currency market,” is also key in luring investments back and reducing the pressure on the naira, according to Salami.

While some investors say short-term interest rates need to go up to curb the rising demand for dollars, the country’s problem may be a lot deeper than merely raising rates.

“It’s a place to start no doubt, but if foreign investors can’t take money out when they want it doesn’t matter what the interest rates are,” one foreign investor told BusinessDay.

Nigeria has a gaping FX demand backlog that has kept several investors on the sidelines.

The jury is out on what the new CBN governor, Olayemi Cardoso, will do about the artificially-low interest rates and how to lure investments back into the country.