Massive Capital Flight Hits Nigeria as Deposit Rates Crash

The national currency of Nigeria, the naira, is under tremendous pressure amid the crisis in the financial sector after the sacking of key bank executives and the suspension of trading in their shares.
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Massive capital flight hits Nigeria as deposit rates crash

Mar 29, 2010

LAGOS—THE unattractive rates in the Nigerian fixed income market have begun to take its toll on the country’s economy, as investors are moving their funds en masse to alternative investment destinations, particularly to neighbouring West African countries.

Investigations by Vanguard showed that the movement of the funds was in response to falling deposit rates which crashed to three per cent in the last two months, despite the fact that the CBN monetary policy rate currently stands at six per cent.

The move is informed by the quest for higher return on investment on cash and near cash assets which Vanguard gathered, is now more attractive in Ghana and West African countries where interest rate on deposit is about 14 per cent compared to the three per cent or even less Nigerian banks are offering depositors.

Capital out flow from the country further rose to $1.740 billion for the week ending, February 12, and moved downward to $1.091 billion for the week ending February 26 and a little further down to $1.061 billion on March 5.

This has resulted in the crash of interest rates in the money market as customers are moving out their deposits.

Bank treasurers have attributed the crash of interest rates to the ongoing CBN reforms where over N600 billion of bank deposits are in the CBN vault at one per cent interest rate as banks have refused to lend just as investors are holding back their investment decisions.

The movement of funds out of the country comes by way of Nigerian residents buying up dollars with their naira and moving it off-shore.

A survey of banks’ deposit rates by Vanguard last week showed that the average deposit rate for 30 days term deposits of below N100 million is about four per cent.

In the last five weeks of January 22, 2010 to March 5, a total of $6.734 billion went out of the country, while about $1.383billion went out in the week ending January 22. The amount of foreign exchange flowing out of the country rose to $1.457billion for the week ending February 4.