It’s 2016 all over again in Nigeria.
Africa’s biggest economy is once again torn between achieving low-interest rates or attracting foreign inflows to support the naira in a battle that could make or mar its latest currency reform.
New president Bola Tinubu has set out to reduce interest rates which he deems to be too high for businesses but foreigners say the rates on naira bonds would need to at least double before they bring in the dollars needed to grease the newly liberalised official fx market.
One-year Treasury Bills in Nigeria were sold at a yield of 8.2 percent at the last auction by the Central Bank of Nigeria (CBN), less than half of the inflation rate of 22.4 percent in May. The yield on the T-Bill is also lower than the monetary policy rate of 18.5 percent.
Nigeria has kept the interest rate on its local bonds artificially low for years to manage the government’s ballooning borrowing costs.
Raising interest rates will therefore not be as straightforward after debt service costs hit 96 percent last year, according to the World Bank data.
That means the government spent N96 of every N100 earned repaying creditors last year and risks spending even more if interest rates went up.
Foreign investors however say the negative real returns which arise from interest rates lower than inflation rate is a deterrent to new dollar inflows. The negative return also reduces the competitiveness of naira assets in the battle for foreign capital among emerging markets.
London-based Abrdn Investments Ltd said rates will need to go up to between 15-20 percent for it to bring its funds back onshore.
Nigeria faced a similar challenge in 2016 when it had to choose between lowering interest rates to stimulate an economy in recession or raising rates to attract Foreign Portfolio Investors. The CBN opted for the latter, paving the interest rates to go up with the one-year T-Bill rising as high as 18 percent.
Yemi Kale, the chief economist at KPMG Nigeria, thinks foreign investors are asking for too much by seeking real returns on investment before returning in sufficient quantity.
“You bring in FX at 5% interest and inflation in your country and get an interest rate on your investment in Nigeria of say 11 percent and you repatriate your capital with little depreciation, so why do you need rates above inflation?” Kale said.
It’s the local investors who are hard hit by the inflation rate rather than the foreign investors, according to Kale.
More details later…