BUSINESS DAY
In Nigeria, when inflation comes for your savings or investment, it takes no prisoners.
The country’s headline inflation, which hit an 18-year high of 25.8 percent in August, wipes out just about all the return on investment in short-term government bonds and even leaves investors with a negative real return. Long-term expectations for inflation means even the longer-dated bonds are also not exciting.
Several countries are unable to give real returns on investment after a global surge in inflation, which peaked last year, but the sheer gap between inflation and interest rates in Nigeria makes it a unique case, at least in Africa.
Yields of 13 percent on one-year Nigeria Treasury Bills against an inflation rate of 25.8 percent in August leaves an investor with a negative real return of 12.8 percent on the one-year bill.
That’s the worst return on paper of any one-year Treasury Bill across Africa, according to official data compiled by BusinessDay.
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.
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