In our Live discussion on markets in our program, a member asked a largely hypothetical question: “does Nigeria have any risk of negative interest rates?” Negative interest rate happens when you receive less than money you have put in a financial investment. For example, if you put N1,000 and there is a negative interest of 1%, you will receive N990 at the end of the year. While it is not common in Africa, some EU countries have used negative interest rates to encourage people to spend, and not to save! Saving means you lose money.
Today, Nigeria has a new record, we recorded a negative interest rate on treasury bills (TB): “The Nigerian Interbank Treasury Bills True Yield went negative [last week] with a 90-day treasury bill trading for -0.0109%. … Interest rates on treasury bills sold on the primary market sold for as low as 0.5% for a 9 months tenor as investors scampered or yields in the low yield market.” The current rate is here.
Indeed a lot of things are happening. Even fixed deposits do not really move the needle. The old savings account strategy is totally unhelpful since everything has been eaten up by inflation. These issues have been well discussed in a course on Capital Markets where our Faculty expounded on this redesign. But he did that during the period when TB was a fair play; he is updating the courseware to capture this evolving scenario of negative interest rates.
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What is happening here is consequential. Just a few months ago when the TB interest rate was more than 13%, we agitated for the government to work to push it low. Without that policy, lending to SMEs was impossible as lenders through the high paying TB had a largely risk-free instrument to invest at double digit yield. In other words, why risk on anything when you can bank on the Nigerian nation via TB at 13%? Government worked and reduced the rates, opening up a fairly improved lending climate in the nation. A+ for the Central Bank of Nigeria on that execution; it was its finest policy implementation.
Treasury Bills are short-term debt instruments issued by the Federal Government through the Central Bank to provide short-term funding for the government. Put simply, anytime you participate in T-Bills primary auction, you are borrowing government money for a fixed and certain return.
The return on T-Bills is so sweet, yourself and banks would rather invest in T-Bills rather than start a business or lend money to SMEs. In Nigeria, anytime you borrow government money, you starve an Entrepreneur the needed funds to start or grow a business, you deplete the real sector. It’s not your fault neither is it the Banks’ fault, Government asked you for money in exchange for fixed returns free from risk and you gladly obliged as a logical being.
However, burdened with the rising cost of debts and unimpressive economic performances, the Government is on a mission to reduce her debts and encourage lending to the real sector. How can Government discourage Investors and Banks from lending her money? One of such ways is to reduce T-Bill rates.
But negative rate? Where do we go from here?
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The economic activities and employment increase by spending money, and never by saving it. What we have not done well at is creating countless ways to make people spend more money; good things happen when do so.
Productivity improves via spending, because if you like taking a bottle of beer after a day’s job, maybe for N500, and to afford it, you must earn additional N500 to get the beer. That is how productivity increases.
We have to design an economic system that encourages people, especially those with spending power, to do less by themselves, while outsourcing most of their routine tasks. If we have more people eating from restaurants than cooking at home, that alone can add couple of billions of dollars to the GDP; but we haven’t gained capabilities on how to frame these things.
Keep creating new things people will find interesting and appealing, and they will look for more money to spend on them…