CBN offers investors more returns on short-term debt to attract dollars

The Central Bank of Nigeria significantly raised interest rates on short-term debt offerings on Wednesday, according to data from Bloomberg.

This move aims to:

1. Reduce Naira Liquidity: Absorb excess naira circulating in the economy.
2. Attract Foreign Investors: Entice foreign investors to bring dollars into the Nigerian market.

Nigeria faces severe dollar shortages, leading to a backlog of unmet demand estimated at a staggering $2.2 billion by the CBN.

The scarcity, coupled with other economic factors, has driven a sharp devaluation of the naira. As of February 8, the official exchange rate stands at approximately 1418.78 naira per dollar, representing a significant depreciation compared to earlier months. The black-market rate was 1500 naira to a dollar.

Nigeria recently eased currency controls and implemented reforms to address a dollar shortage in the foreign exchange market.

Details of CBN’s rate hike

• Treasury Bills Sold: The CBN sold N1 trillion ($696 million) in treasury bills to local and foreign investors.
• Yield Increases:
  • 1-year bills: 19% (compared to 11.5% previously) – highest in 12 years
  • 3-month bills: 17.24% (compared to 5% previously)
  • 6-month notes: 18%

The 19% rate for the 1-year bills exceeds the current bank’s benchmark interest rate of 18.75% for the first time.

It also moves closer the inflation rate, which stood at 28.9% in December 2023.

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The CBN aims to bring interest rates closer to market realities in Nigeria. In this regard, it expects that higher debt returns will entice foreign investors to hold naira-denominated bonds, thereby increasing dollar inflows.

Also, increased dollar supply should help stabilize the naira’s exchange rate against major currencies.