Rising Interest Rates: What Has Changed?

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Less than a year ago, the government’s 364-day T-bill was close to 1%. You could say the funds were cheap back then, and they really were. While the low interest rate can be attributed to the Central Bank of Nigeria’s approach to revive the economy and mitigate the impact of COVID-19, the question is, what exactly has changed? in politics to justify the interest rate hike?

Fast forward to the present day: rates have more than increased; 91-day T-bills now attract rates of around 2.5%, with six-month and one-year bills having rates of around 3.5% and 7.5%, respectively.

Looking at the chart, it is clear that rates are turning back to where they were two years ago and earlier. They are increasing and the reason is obvious, says Dr Bong Adi, Lecturer in Economics at Lagos Business School. “Prices don’t go up on their own. The government is looking for money. They borrow money from everywhere, ”he says.

Adi says the low interest rates that have prevailed over the past two years must have been part of the central bank’s efforts to encourage investment in the real sector. “But this is not the case.”

“Investments in the real sector will happen when there is security in the country, when there is a bit of predictability in the country, when you can understand the politics,” says Adi.

When you talk about investing in the real sector, you are talking about manufacturing and other non-financial productive activities.

That Nigeria has been on a borrowing frenzy is no longer news. Even before the COVID-19 pandemic, the country was already in debt.

The 2020 budget deficit has been mainly financed by borrowing and therefore a large part of the 2021 budget is also financed by debt. The government borrowed so much that it broke its own law, the Fiscal Responsibility Act, which limited the budget deficit to a maximum of 3% of GDP.

Moreover, the revelations from the budget presentation that we have used about three-quarters of revenues for debt service in the first eight months of this year are unsustainable in the management of fiscal policy. For next year, the government has estimated debt servicing at 3.61 billion naira.

With the total projected income available to finance the budget set at 10.13 billion naira, this results in a debt service-to-revenue ratio of 35.64%. And given that debt service is more likely to increase and revenue is lower than budget as it has always been, there is a greater chance that this debt-to-revenue ratio will remain high at current levels, strengthening the nation’s debt. service charge.

While the government is borrowing and will continue to borrow so much, shouldn’t there be ways to keep interest rates low like we did last year? This will help reduce the debt servicing burden on the government and reverse the current realities where most real income is spent servicing the debt with little or nothing to run the government, let alone building the government. essential infrastructure?

Far from the public sector, rising interest rates are a double whammy for the private sector. As interest rates rise, businesses pay more on their loans and have limited access to capital. The BUA group, which raised 105 billion naira of 7-year bonds on the capital market in December 2020 at 7.5%, could possibly pay 13% or more today if it were to borrow on the same terms.

Worse yet, as the higher interest rate increases the government’s debt service burden, pressure mounts on companies to pay more taxes, as evidenced by the aggressive war on taxes, even between states and the federal government.

The Nigeria case study is still breathtaking, as nothing seems to have changed much to cause interest rates to rise. Inflation is gradually slowing, although still very high, and the monetary policy authority has reaffirmed that current inflationary pressures reflect structural challenges with little or no monetary policy solutions.

External reserves are increasing, although the value of the naira continues to weaken in the parallel market. Thus, the only explanation for the rise in interest rates appears to be the need to attract REITs and curb the urge of Nigerians to buy foreign currencies due to the low yields on naira-denominated assets.

Abiola Rasaq, a Lagos-based financial analyst, notes that “CBN is stuck between a rock and a hard surface.” He wishes to keep the interest rate environment low to lower the cost of capital for business and government, although his main responsibility is to stabilize prices, especially the value of the Naira, which has been subject to pressure. some speculative pressure in recent years. months, with a notable loss in the parallel market.

Therefore, the rise in interest rates may perhaps reflect the CBN’s compromise to attract REITs and FDI into the country, especially as both capital flows have reached new lows in recent times. FDI in the second quarter was just $ 0.8 billion or 0.18 percent of GDP, an insignificant level to supplement domestic investment, needed to catalyze the capital formation needed to close the employment and job gaps. production.

Inflows of foreign portfolios in bonds and treasury bills were also weak. Therefore, rising rates help re-attract REITs, stem the growing demand for foreign currencies from foreign fund managers looking to repatriate their matured investments rather than reinvesting at low rates, everything helping to stimulate the appetite of domestic investors for naira denominated assets and reduce speculative foreign currency investments and foreign currency denominated assets.

According to Rasaq, the current rise in interest rates is a consequence of the CBN’s current priority in managing exchange rates.

“In addition, global interest rates are rising as central banks in developed markets signal a gradual return to political normality to combat the global information syndrome. Therefore, maintaining a low domestic interest rate will further reduce the real interest rate differential on naira-denominated securities and intensify capital flight, if the CBN were to maintain its 2020 position of maintaining rates at historically low levels, where yields on US dollar based assets were almost at the same level as naira denominated instruments, ”Rasaq added.

If Rasaq’s conjecture is true, and it reflects that the Naira really is the big elephant in the room, what political options are left in CBN? Can we compromise to keep interest rates low in order to stimulate economic activity and hopefully relieve the public sector of the high debt servicing burden that could drive out all Nigerians in the very short term?

Adi criticizes the government for continuing to borrow abroad in this environment of high exchange rates and high inflation. The government is forecasting an inflation rate of 13% for 2022, but for now it is in the order of 17.38%. The naira continues to lose value at the same time, even though the government’s projected rate of N / $ 410.15 for the 2022 budget. Uncontrolled borrowing at these interest rate levels means the government can resort to lending. The impression of more naira at any given time to repay these bonds, which will exacerbate the already stubbornly high inflation rate and the volatile exchange rate situation.

Perhaps now is the time for the fiscal and monetary authority to strengthen coordination and improve the policy direction and practical results towards a sustainable Nigeria that guarantees a better future for present and future generations.


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