According to the Central Bank of Nigeria, the primary market recorded a rise in interest rates for the first time in 3 months. The rise was recorded in the recent 13th May auction as interest rates rose to 2.5% (+35%) and 2.85% (+16%) for the 91-day and 182-day tenor respectively when compared to the preceding auction1. The rise in interest rates can be attributed to lower demand given that investors are seeking for safer assets in more stable currencies in these unprecedented times. Bearing in mind that the government aims to mobilize domestic funds following a shift in debt sourcing, this will increase the cost of borrowing for the government. In addition, considering that the interest rate on T-bills is the benchmark interest rate, the rates of other commodities including bonds and equities are expected to rise. The rise in interest rate will increase the need to save for households, thus lowering consumption and increase the cost of borrowing for firms, thus reducing investment. The overall effect will be a negative impact on economic growth.
June 3, 2020
Nigeria Economic Update (Issue 20)
Related
Nigeria Economic Update (Issue 7)
External
reserve dropped slightly by 0.6 per cent from $28.35 billion in January 22 to
$28.19 billion in January 295. Considering the continuous decline, government
has stepped up efforts towards financing the deficit in the proposed budget
through borrowing. At the forex market, the official exchange rate remained
unchanged at N197/$ while the naira depreciated at the parallel market by 2.36
percent from N297/$ to N304/$ between January 22 and 296. Despite
the huge spread between the official and parallel market exchange rates, the
monetary authorities maintained its fixed exchange rate regime at the official
forex market. It is expected that if the demand pressure for dollar persists,
the value of naira may decline in the near term.