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States bonds: CBN grants liquidity status

By Peter Egwuatu
Central Bank of Nigeria (CBN) has granted liquidity status to bonds issued by state governments, subjects to specified eligibility criteria.

The apex bank’s  Monetary Policy Committee (MPC) at its  meeting held between  March 1–2, 2010 revealed that Monetary Policy Rate (MPR) remains at 6 per cent just as the Standing Lending Facility interest rate remains unchanged at 8 per cent while the Standing Deposit Facility rate was lowered from 2.0 per cent to 1 per cent.

Reacting to the issues reached at the meeting, Afrinvest Research, a member of the Nigerian Stock Exchange (NSE) said , “ while the reduction in standard deposit facility by a 100 basis points to 1.0% aims to propel banks towards new risk-asset creation, we are of the opinion that this apparent lack of risk appetite will continue in the near term, pending the timely absorption of the toxic assets of banks by the Asset Management Company of Nigeria (AMCON).

We also expect a wave of re-consolidation to follow thereafter, on the back of greater visibility and better valuation metrics, particularly for the troubled banks. The widening in the asymmetric corridor around the MPR will exacerbate the existing liquidity glut in the FG Bond /T-Bills market and is expected to depress bond yields even further.

“ The liquidity status now conferred on State Government Bonds should result in a surge in demand for sub-national debt securities. However, the limited number of issuers to date and the size of current issues (relative to FG Bonds) will conspire to impose limitations on the development of a vibrant OTC market for these instruments, given the rather stringent conditions of fiscal responsibility imposed on this class of issuers.”

Continuing, “  The N500.0billion ($3.3bn) in quantitative easing specifically earmarked for “emergency power projects” is a step in the right direction, though inadequate for meeting the huge gaps arising from decades of neglect.

It’s necessary to highlight that the CBN may be seen to be over-reaching itself with this move in our view, as we believe it remains the sole responsibility of Government (through the ministries of Power and Finance) to drive infrastructure development” Afrinvest added.

In the communique issued after the meeting, the MPC said, “ To continue with the quantitative easing policy by providing a N500.0 billion facility for investment in debentures issued by the Bank of Industry (BOI) in accordance with Section 31 of the CBN Act 2007, for investment in emergency power projects dedicated to industrial clusters.

The funds are to be channeled through the Bank of Industry for on-lending to the DMBs at a maximum interest rate of 1.0% for disbursement of loans with a tenor of 10 – 15 years at concessionary interest rate of not more than 7.0%.”

The Committee also approved in principle the extension of this facility to DMBs for the purpose of refinancing/ restructuring existing portfolios to manufacturers. However, the final approval for this will come after the consideration of the report of a technical committee to be set up to work out the modalities, for implementation within one month.

Meanwhile, it should be noted that  membership of the committee comprise of the CBN, the Bankers’ Committee Sub-committee on Economic Development, Bank of Industry, Manufacturers Association of Nigeria (MAN), and National Association of Small and Medium Enterprises (NASME).


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