How Nigeria’s Central Bank is Eroding Savings

By Our Staff Writers

Nigerians saving money in the national currency, the naira, have been facing a unique situation since late last year, where any amount of money they put away as savings will ultimately result in a loss.

Banks deposit rates have plummeted, bonds and treasury bills yields have fallen to the lowest in decades, with the financial system awash with liquidity in search of safe havens.The reverse should’ve been the case at a time the government is on a borrowing spree, with annual inflation at 12.8 percent and the benchmark monetary policy rate set by the central bank at 12.5 percent, interest rates should also be in the double digits. To make matters worse, two devaluations implemented by the central bank since May have shaved about 20 percent off the value of the naira.

Nigerian bond yields in decline.

“It’s an unusual phenomenon that is best described as Buharinomics,” said Bayo Ojelabi, a Lagos-based financial adviser and asset manager. “It was achieved essentially by fiat rather than the usual monetary tools employed by central banks.”

In October last year, the central bank issued a directive to bar individuals and corporate organizations in Nigeria from buying its Open Market Operations bills that offered lucrative yields of 13-18 percent, making it a preserve of foreign portfolio investors with hard currency.

The result is that your pension fund administrators, fund and asset managers as well as treasury departments of major corporations, were forced out of this segment. All were now forced to deal in the bonds and bills issued by the Debt Management Office, where an excess of demand drastically forced down yields.

This is yet another aftermath of oil-price shock dealt Nigeria by the coronavirus pandemic and the consequent collapse of oil demand, the source of more than 90 percent of its foreign earnings. In an economically interdependent world, foreign reserves have come to represent a key indicator of a country’s ability to honor deals. For countries, such as Nigeria, that are reliant on single commodities for foreign receipts and at once import dependent, it becomes even more critical. 

Therefore, between Nigeria, Africa’s biggest economy, and South Africa, the continent’s most industrialized, foreign reserves of $35 billion mean starkly different things. With less to import than Nigeria, it would be a relatively comfortable place to be for South Africa. But for Nigeria that has to import many more manufactured goods, it’s a terrible place to be with just enough to guarantee imports for only a couple of months.


Which probably explains recents moves by the Central Bank of Nigeria in apparent keeping with its role of maintaining price stability in the economy. Apart from oil and gas earnings, another significant source of foreign currency flows into the country is through portfolio investors.

These are investors who send money into foreign markets to invest in their stocks, treasury bills and bonds (as against longer-term investors in say hydrocarbons, manufacturing or agriculture). These funds are highly mobile and can go as easily as they come, for which they’ve earned the description of hot money.

In the years following the recession of 2016, caused by a plunge in oil prices and government revenue, Nigeria sustained government spending by borrowing through the issuance of treasury bills and bonds at rates in the region of 10 percent to 18 percent. That attracted hot money in the range of $6 billion to $10 billion. 

And while many foreign investors shunned  the stock market due to the political risk associated with the 2019 elections, many chose to remain in the fixed income market due to its lucrative offers. It was an appetite further whetted by the central bank when it, which now offered OMO bills meant to control liquidity at equally tantalizing rates. This caused everyone from individuals, corporate organizations, asset and pension funds to flock to this segment.

Source: government

Perhaps prompted into action by Nigeria’s mounting debt service bills (more than 60 percent of government revenue), the central bank in October last year suddenly barred individuals and corporations from investing in the OMO bills, making it the exclusive playground of foreign investors. As already noted, the impact has been devastating for interest rates in the financial system.

Though the central bank’s inflation targeting expects it in the range of 6-9 percent, it’s been off the mark for the past six years. Faced with Nigeria’s current financial crisis, Governor Godwin Emefiele appears content to just serve as the government’s financier while throwing the general saver under the bus, with inflation running ahead of any interest rate depositors and bond investors can earn.

For the Buhari administration, it’s been a windfall of sorts. At a time it should be paying more to borrow because of its financial constraints, it’s getting almost concessionary interest rates. The pity is that the borrowings go largely towards funding recurrent expenditure, paying for the salaries and lavish lifestyles of our civil servants and politicians, and hardly for productive activities. Head or tail, the country loses.