Nigeria raises bond yields to drive up demand for currency
The Nigerian government has taken steps to raise interest rates on local currency securities with the aim of attracting investors to these assets. This move is part of a broader effort to address excess liquidity, combat inflation, and stabilize the value of the naira, the national currency.
The country's debt management agency is currently offering three-year savings bonds at an interest rate of 13.46%, marking a significant increase of 139 basis points compared to a previous sale in October. This 13.46% rate is the highest observed in a year, as indicated by a statement on the agency's website.
Furthermore, the Central Bank of Nigeria recently sold 99-day OMO (Open Market Operations) bills, which are typically favored by both domestic and foreign investors, at an interest rate of 13.9%. This represents a substantial 390 basis point increase compared to the rate at which similar securities were sold in August.
Key Takeaways
The above measures are intended to encourage investment in local currency securities and provide a boost to the economy. Despite the Central Bank of Nigeria's monetary policy rate standing at 18.75%, short-term interest rates in Africa's largest economy remain significantly lower. This situation has contributed to an inability to curb excessive demand for the US dollar and reduce the high inflation rate, which currently stands at 26.7%. These actions are part of a broader effort by the government, led by President Bola Tinubu, who assumed office on May 29, to combat inflation and stabilize the naira, which has depreciated by over 40% against the US dollar. The government has implemented various measures, including relaxing foreign exchange regulations to streamline the exchange rate system and attract investment. However, these changes have led to naira volatility. Additional steps have included clearing a backlog of fully developed foreign exchange forward contracts and approving around $625 million package aimed at improving food supplies, reducing transportation costs, and promoting manufacturing.
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