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Negative real returns hurt Nigerian investors, savers

Negative real returns hurt Nigerian investors, savers

Nigerian savers and investors have yet to get the relief they were looking for from rising interest rates.

The return on one-year treasury bills has more than tripled to 10 percent from only 3 percent two years ago.

The sharp acceleration in inflation, however, means investors and savers are still left with the negative interest rates they suffered when interest rates were lower.

Economists are forecasting a 20 percent inflation rate for the month of August. It was 19.64 percent in July, according to data by the National Bureau of Statistics (NBS).

That means investors in Nigerian one-year Treasury bills, one of the most traded government securities, are left with a negative return of 9.64 percent.

That compares with the real returns of 1.05 percent and 1.41 percent in Egypt and Kenya respectively. The return in South Africa, though negative, is still better at -0.59 percent.

The Central Bank of Kenya has its one year T-bills rate at 9.9 percent while its inflation rate was 8.5 percent in August. This shows that Kenya has a positive real rate of return of 1.41 percent.

Also, the Central Bank of Egypt’s one-year T-bills rate is currently 15.65 percent while the country has an inflation rate of 14.6 percent as of August, yielding a positive real rate of return of 1.05 percent.

However, South Africa has a negative return of 0.59 percent. This is because the South African Reserve Bank set its 364-day T-bills rate at 7.21 percent, which is less than its June inflation rate of 7.8 percent.

NIgeria's real return lags peers
NIgeria’s real return lags peers

The situation is much worse for savers in naira who are stuck with low return on deposits.

“The negative return on the naira is partly responsible for the rash of investments in bitcoin and why people are not saving in naira,” a source familiar with the matter said.

The Central Bank of Nigeria (CBN) is aggressively raising interest rates in a bid to tame inflation and ultimately reduce the negative real return on investment.

The bank raised the benchmark interest rate twice already in 2022 to where it currently sits at 14 percent in a bid to tighten liquidity and curb inflation.

The CBN also directed that interest paid on savings accounts should be adjusted to 40 percent of the benchmark rate which gives savers 4.2 percent.

The efforts have not eased the pain of investors and savers.

Giving investors and savers real return on investment would take addressing the foreign exchange shortage and addressing the insecurity situation, according to some economists polled in a BusinessDay survey.

Addressing the insecurity situation and improving dollar supply would help reduce inflation, which is eating into the returns of investors.

Read also: Nigeria remains potential investment destination despite challenges- Uduanu, others

The return on the one-year Nigerian T-bill is higher than the return on the Kenyan and South African T-bills, with the exception of the Egyptian T-bill.

“There’s still some way to go in reducing the negative return on investment despite the higher interest rates,” said Ayo Teriba, CEO of Economic Associates.

“There’s no incentive to save money in such an environment and that hurts domestic capital mobilisation,” Teriba said.

Temilade Aderibigbe, a Lagos-based fund manager, said clients were being advised to invest more in alternative assets to compensate for the high rate of inflation.

“There is a rush for alternative assets and that will happen for as long as investors and savers are not getting what they want in terms of real returns,” Aderibigbe said