A call for Nigeria’s monetary authorities to ensure a positive real interest rate in the economy has been described as unattainable now given a high inflation rate environment.
In a post five days ago, Bode Agusto, a former Director General of Nigeria’s Budget Office, declared that the current interest rate management policy in Nigeria makes savers lose purchasing power while it gives loans at subsidised rates – that is, rates below the rate of inflation – to borrowers.
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Those funding the subsidy being given to borrowers are Nigerian workers saving to build pensions assets, shareholders of banks and insurance companies and small savers, while the key beneficiary from the subsidies is the federal government – the biggest borrower, Agusto noted.
In his postulation, Agusto argued that: “Setting the risk-free rate at a level significantly below the rate of inflation reduces confidence in the Nigerian Naira because savers are unable to earn a positive return in real terms. It also fuels speculative demand for foreign exchange as savers seek solace in currencies that can store value better.”
He further argued that Nigeria’s policymakers should review the country’s interest rate policy to ensure that savers in the country do not lose their purchasing power as “This will reverse the erosion of the value of pension assets and reduce speculative demand for hard currencies. If interest rates are uncompetitive, demand for government securities wanes and savers will seek solace in hard currencies putting pressure on exchange rates.”
But analysts say the search for positive real rates is a herculean task now given the historically high interest rates prevailing globally. This argument is raging amid the continuing rise in Nigeria’s inflation rate. The country’s headline inflation rose to 19.64% in July, the highest in about 17 years, according to figures released on Monday by the National Bureau of Statistics. The rate in June was 18.6 per cent, against a Monetary Policy Rate of 13. At these rates, Nigeria’s real interest rate is a whopping negative 6.7 per cent.
“Currently, there are very few countries where the theoretical argument of positive real rates holds…From the United Kingdom to the United States, Canada, Australia and Europe, savings rates are below inflation rates notwithstanding the aggressive monetary policy tightening,” said Abiola Rasaq, a Lagos-based financial analyst and former Chief Economist at United Bank for Africa (UBA).
Relating this to the Nigerian situation paints a clearer picture of the weakness of the classical theory of positive real rate. It is clear that the savings-investment channel is very weak in Nigeria, with most arguments around savings being about risk-free instruments.
Pension funds, banks, insurance and even HNIs and retail investors in Nigeria mainly invest in risk-free instruments issued by Nigerian sovereign, mainly to finance recurrent expenditure.
Rasaq points out that this is not the type of investment that deserves positive real rates. According to him, the overwhelming influence of such investments unduly exacerbates inflationary pressure because it does not create production, rather it fuels consumption, especially as some of the funds end up in rent-seeking, leakages and other forms of inefficiencies in the public service.
“So, why should such risk-free investments that continue to crowd-out private sector capital formation be encouraged with positive returns? Indeed, the returns on such assets should be near zero for obvious reasons, including the fact that they generate little or no returns,” he noted.
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