Nigeria, starved of foreign investment inflows, is among countries ill-prepared to cope with the backlash of accelerating global inflation and rising interest rates in the United States.
The real interest rate in Nigeria is currently negative at -5.9 percent, which ranks Africa’s largest economy among nations with the lowest real interest rates in emerging and frontier markets.
Real interest rate is defined as current policy rate minus last reported year-on-year (yoy) inflation.
According to Tellimer Research, a global technology, information and data provider, Nigeria’s negative real interest rate exposes it to exchange rate pressures and further capital flow reversals in the face of rising global inflation, and in the event that the United States starts to pull back from its monetary stimulus, which could in turn drive interest rates in the US higher.
Nigeria is already faced with current account pressures due to a drastic slump in dollar inflows. The country’s trade deficit swelled to the most on record in the first six months of 2021, hitting N5.81 trillion as imports surged.
Nigeria’s Monetary Policy Rate (MPR) has remained at 11.5 percent since September 2020, while inflation has slowed to 17.38 percent in July 2021 from a high of 18.17 percent in March. There however remains a considerable gap between both rates.
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Other African countries with lowest real interest rates (below minus 1%) that are the least prepared and most vulnerable are Mauritius and South Africa; while in Asia, countries like Hong Kong, Pakistan, Philippines, South Korea, Sri Lanka, and in Europe: Iceland, Georgia, Poland, Romania, and Ukraine, among others.
What this means is that should global conditions, inflationary pressures or US rates significantly deteriorate, countries with lower real rates need higher rates hike, which leads to more damage to growth.
Tellimer notes that global food prices are accelerating again and are up 33 percent yoy. In view of this, Hasnain Malik, strategy and head of equity research at Tellimer Research, believes that emerging markets with higher real interest rates should be better prepared in case inflation persists or the US starts tapering (and US yields go up).
The highest real rates are found in China, Indonesia, Taiwan, Vietnam in Asia; Egypt, Ghana in Africa, and Bahrain and UAE in the Middle East.
Giving his thoughts on the development, Taiwo Oyedele, head of tax and corporate advisory services at PwC, says Nigeria’s economy is in recovery mode but growth is slow and fragile.
“In addition, our country’s risks have been exacerbated especially by forex scarcity and insecurity. These risk factors make it difficult to attract foreign investment as we have seen from the declining quarterly Foreign Direct Investment (FDI) numbers since the outbreak of the COVID-19 pandemic,” he says.
Consequently, Oyedele states that if developed countries, which are considered generally safer for investments, start to taper off then it will become even more difficult for Nigeria to attract and even retain the much needed foreign investment to boost the economy.
Foreign investment into Nigeria slumped to the lowest level in four years in the first six months of 2021, according to the National Bureau of Statistics (NBS).
The total value of capital imported into Nigeria declined to $875.62 million in the second quarter (Q2) of 2021, the NBS said in its latest report. This represents a 54.06 percent drop compared with the $1.91 billion in the first quarter (Q1) of 2021.
FDI dropped to $77.97 million in Q2’ 2021, indicating a 49.6 percent and 47.5 percent decline compared with $154.76 million and $148.59 million recorded in the previous quarter and Q2’ 2020, respectively.
“Nigeria is one of the least prepared because our economy is heavily dependent on importation (from raw materials to finished goods). This puts us at a risk of increasing cost of production as regards imported raw materials and increase in price of imported finished goods,” Olusegun Akintunde, an analyst at Polaris Bank Limited, notes.
“Our inability to produce most of the currently imported items locally put us at a disadvantage,”Akintunde says.
At its last meeting in July 2021, the Monetary Policy Committee (MPC) noted the rise in inflation above the long run objectives of some key advanced economies, although reported as transient and therefore not expected to lead to an adjustment of the stance of monetary policy.
However, the Committee pointed out the lingering risk of an early return to monetary policy normalisation, should price development continue to trend upwards.
Across several emerging market and developing economies, inflationary trend was on average mixed, with some of the economies recording higher rates, compared with their peers. This was largely due to exchange rate pressures, capital flow reversals, high energy costs, weak supply chains and poor response to policy stimulus to combat the macroeconomic slowdown associated with the COVID-19 pandemic.
