Against the backdrop of escalating inflation, analysts have shed light on the prevailing dynamics of Nigeria’s financial system, revealing a stark contrast between the fortunes of low-income earners and high-net-worth individuals (HNIs) and big corporate entities.
The National Bureau of Statistics (NBS) recently released figures indicating a Year on Year (YoY) inflation rate of 27.33 percent for October 2023, marking the 10th consecutive monthly increase and the highest inflation rate in 18 years.
In response to this trend, the Central Bank of Nigeria (CBN) has implemented inflation-targeting measures, including an upward adjustment of the Monetary Policy Rate (MPR).
Consequently, interest rates in the money market have risen steadily, maintaining high liquidity.
Investigations by Vanguard have exposed a significant disparity in the financial benefits experienced by HNIs and large corporations compared to low-income earners.
The former have capitalized on the situation, channeling substantial resources into financial assets, particularly in the fixed-income market and equities, yielding substantial returns throughout the year.
Fixed deposit rates have surged to record highs, averaging 15 percent in the third quarter, with various fixed-income securities reaching 17 percent.
This trend aligns with the CBN’s elevated MPR, which reached 18.75 percent in the third quarter, with the possibility of further increases in the upcoming Monetary Policy Committee (MPC) meeting.
Surprisingly, returns on equity investments have also hit a record high of 35 percent in the third quarter, contradicting the conventional expectation that rising fixed-income returns would lead to a decline in equity returns.
Conversely, low-income earners face challenges stemming from the mounting inflation, eroding their purchasing power and limiting their ability to save or invest.
Naija Update’s findings indicate that while HNIs and large businesses enjoy higher interest rates on deposits, they also benefit from lower interest rates on loans and nearly unrestricted access to credit.
On the other hand, low-income earners and small businesses encounter low interest rates on their meager savings, with bank charges sometimes negating any interest earned.
Additionally, they struggle to secure loans, and when granted, face significantly higher lending rates than those offered to HNIs and big businesses.
Economists warn of the impending risk of deepening poverty amid significant financial returns in the economy, fostering a scenario where the rich become richer, and the poor become poorer.
Analysts interviewed by Vanguard provided diverse perspectives on the situation, offering explanations for the current state and predicting its potential persistence or exacerbation in the near future.
David Adonri, Analyst and Vice Executive Chairman at Highcap Securities Limited, explained the market-driven nature of money market services, citing the unregulated pricing of services and the emphasis on maximizing income and minimizing risks.
Tajudeen Olayinka, Analyst and CEO of Wyoming Capital & Partners Limited, emphasized the negotiating power of depositors, longer tenors of fixed deposits, and the challenges faced by banks in managing liquidity when dealing with small savers.
Afrinvest West Africa analysts linked the rising inflation and returns on money market investments to favoring big players, projecting a sustained uptick in yields due to the expectation of continued inflation.
Looking ahead, analysts at WTI Financial Services predicted the maintenance of a tightening stance by the CBN, anticipating that higher interest rates might lead to a reallocation of funds by investors from equities to fixed income to capture higher yields.
The implications include a potential bearish trend in the equities market.
As the financial landscape continues to evolve, the intricate interplay between inflation, monetary policy, and investment dynamics underscores the need for a comprehensive understanding to address the disparities between different segments of society.
