Goli Innocent 
As part of its attempts to absorb surplus liquidity, control inflation, and stop the naira’s decline, the Nigerian government increased the interest rate on local currency securities.
This was contained in a statement posted on the Debt Management Office (DMO) website on Monday, noting that the move is to draw investors to its assets.
According to the statement, the debt management company is selling three-year savings bonds at 13.46%, which is 139 basis points higher than the rate it offered at a prior sale in October and the highest rate in a year.
The Central Bank of Nigeria (CBN) had last week sold 99-day OMO bills patronized by banks and offshore investors at 13.9%, a 390 basis points increase compared to the rate at which it sold securities of a similar tenor in August.
With short-term interest rates trading considerably below the Central Bank of Nigeria’s monetary policy rate of 18.75%, Africa’s largest economy has failed to restrain excessive dollar demand and reduce inflation, which is currently running at 26.7%.
Ayodeji Dawodu, the Head of Africa Sovereign and Corporate Credit Research at BancTrust & Co. in London said raising rates will “drain excess liquidity, help to fight inflation and curb the naira chasing the dollar, which will help stabilise the exchange rate.” The rates will also be “moving closer to effective real returns” if the strategy is maintained, he stated.
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The action supplements other measures implemented by the government under President Bola Tinubu, who took office on May 29, to stop inflation and the naira’s more than 40% decline versus the US dollar.
Since the most populous country in Africa relaxed foreign exchange regulations to streamline its exchange rate system and encourage investment by bringing in dollars, the naira has been unstable.
Additional steps include paying off a backlog of fully developed foreign exchange forward contracts and approving a 500 billion naira ($625 million) package to enhance food supplies, reduce transportation expenses, and increase manufacturing.
Bloomberg data shows that average yields on local currency-denominated sovereign bonds have risen to 15.99%, the highest level since 2017. This increase is attributed to the policy rate hike and higher interest rates given on naira debt securities.
Bond prices have generally been adjusted to reflect tighter monetary policy and higher government-offered yields, according to Dawodu. “The higher funding requirements of the government also tend to drive up the rate.”
