Nigeria back on investors’ radar as interest rates jump, CBN clears backlog

Nigeria is on the radar of foreign investors once again after a seeming slowdown in reforms initially saw them grow cold feet towards West Africa’s biggest economy.

That’s after the Central Bank of Nigeria (CBN) is finally allowing a rise in market interest rates to match inflation and has begun to clear the foreign exchange backlog that has drained confidence in broader FX reforms.

The one-year OMO bill for instance sold for 21 percent at the last auction, double the return compared to last year (12 percent in December 2022) and also higher than the 17 percent yield at the first auction of the year which happened in August, according to data by the CBN.

The yield on the one-year Treasury bill has also doubled to 13.5 percent from 6.2 percent when compared to the month of June when President Bola Tinubu assumed office.

The rise in market rates is making Nigeria attractive again, according to American bank, JP Morgan.

Read also: Relief in sight as CBN pares down FX backlog

“The naira now ranks highest on our risk-reward scorecard due to elevated carry, however we remain on the sidelines waiting for better line of sight on FX inflows and more consistent liquidity tightening measures,” Ayomide Mejabi, an emerging markets strategist at JP Morgan, said in a note to clients.

The rates are likely to rise even further with Nigeria’s headline inflation printing at an 18-year high of 26.7 percent as at September.

“T-bill and bond rates have risen, but we see scope for further upward adjustments. We expect authorities to maintain some willingness for a somewhat flexible exchange rate (at least relative to recent years),” Mejabi noted.

The large backlog of unmet foreign exchange demand which has cast a pall on the reforms in Nigeria also being resolved after the CBN cleared a part of the backlog this week.

The CBN has cleared outstanding matured FX forwards owed to some banks which include Citigroup, Standard Chartered, and Stanbic IBTC, in a boost to investor sentiment. The local banks have not been fully settled but sources close to the presidency say they are next in line to be addressed.

Nigeria hopes to secure around US$10 billion of new inflows to clear the outstanding FX backlog.