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Financial markets as way out of Nigeria’s debt overhang

By Udeme Clement

As the nation’s debt increases, stakeholders are divided on the implications of a burden of $4.5billion external and N4.5trillion domestic debts on a developing economy like Nigeria . While some advised the Federal Government to diversify the economy by placing emphasis on agriculture and the non-oil sector to enhance more revenue generation to sustain the economy, others believe that Nigeria needs adequate financial markets access and strong bond market to manage its debt.

Some financial analysts who spoke with Sunday Business, expressed their views:

Government should borrow to execute capital projects if the economy must develop to attract foreign investments: Mr. Rechard Tinubu, Management and Financial Consultant to Osun State government.

Government is a continuous process and an institution of the state and for the leadership to continue to create wealth among the citizenry. The Government must continue to look inward with a view to satisfying the yearnings of the people in the area of welfarism geared towards infrastructure renewal.

Hence the government must continue to borrow to sustain its policies. In a developing economy like Nigeria , the government needs to invest in infrastructure, public goods and capital projects to stimulate economic growth and development in the long-run. In that capacity, the government needs more income to execute these projects.

This requires borrowing from external sources to finance the economy. However, the important thing is that government should ensure adequate utilisation of these resources whether external or internal to maximise outputs in the economy. Also, government needs to put a mechanism in place to ensure efficient management of its debts to ensure sustainable development.

The government should continue to develop the nation’s domestic bond market in such a way that the private sector players could borrow to invest and finance projects with long term benefits. This could pave way for sustainable growth in the economy.

Federal Government should invest tangibly in agriculture in order to generate more revenue to manage economy instead of external indebtedness: Dr. Godwin Oyedele Oyediji, former chairman, Agriculture, Non-oil Export Trade Group, Lagos Chambers of Commerce, Industry, Mines and Agriculture (LACCIMA):

For instance, the agricultural sector of Nigeria’s economy has the capacity to absorb over 500.000 work force annually if power improves and necessary infrastructures are provided to create an enabling environment. As such, the sector should be adequately funded to boost government’s revenue as additional source of income-flow in the economy. Large scale farming should be encouraged and our farm produce should be exported to other countries to enhance revenue generation.

Aside from that, government should not allow IMF to control our economy. For instance, IMF recently advocated for devaluation of the naira, which I believe was not in the best interest of our economy. IMF officials gave similar suggestion during the administration of the former military head of states, Ibrahim Babangida, and the outcome was a disaster for Nigeria The idea brought about a huge damage with negative consequences to the country and up till now, the economy has not fully recovered from that policy.

There is need for financial markets access in Nigeria and West African sub-region to enhance mobilisation of domestic resources as an alternative source of financing: Director general, West African Institute for Financial and Economic Management (WAIFEM), an agency of the Central Bank of Nigeria (CBN), Prof Akpan Ekpo.

The reality is that the financial markets in West Africa and indeed most sub-Saharan African (SSA) countries are shallow and have inadequate access to finance. As a result, mobilisation of domestic resources as an alternative source of financing is becoming increasingly important in Africa . It is important to note that prior to the recent financial crisis, many countries enjoyed relatively simple access to external donor funds, predominantly in the form of multilateral and bilateral loans and grants secured on concesssional terms from soft windows of the Breton Wood Institutions.

In the recent past, most WAIFEM member countries put development of bond markets particularly local currency bond at the front burners of their national policy agenda. The common motives for this trend including the desire to develop local capital markets in order to improve the flexibility and effectiveness of sourcing funds for financing local infrastructure and other medium-long term projects for socio-economic development. Of importance too, has been the need to avoid the currency mismatch which may be associated with domestic debt that is denominated in foreign currencies and which has been known to trigger and even worsen severity of financial crises.

Nigeria and other African countries need to focus on bond markets as well-functioning and stable financial bond markets are needed to foster and accelerate economic development. A recent IMF study, reckons that emerging market economies with open financial markets have in the last 30 -35 years grown three times as fast as those countries where the markets have not yet opened up. Despite an increasing participation in the financial globalisation, financial markets in emerging market economies still lag behind mature markets in many aspects. For example, the bond market capitalisation in emerging market economies amounts to just 40 per cent of gross domestic product (GDP). The corresponding figure for mature markets is 140 per cent and more than three times as much.”

The essential requirement for maintaining a well-functioning bond markets are, legal and regulatory framework that support the development of bond markets. This is vital for the development of the bond market since it provides for an institutional mechanism to enforce the rules. Many stock exchanges, securities and exchange commissions across the world have developed as self-regulatory organisations under the supervision of a national regulator. Debt capital regulation should provide rules, processes and procedures to deal with listings of bonds, trading rate capture, matching of trades, clearing and settlement, surveillance, dispute resolution, failed trades, default procedures and appeal processes.

Accordingly, there must be sanctions regarding market manipulation and providing misleading information, licensing, monitoring, sanctions and penalties of inter-dealer brokers and licensing powers, duties and responsibilities of self-regulatory organisation and supervisory bodies should be taken seriously. Others include ownership, transfer, pledge of securities and security depositories, internationally accepted accounting standards, practices and corporate governance as well as legislation to prevent money-laundering, fraud and other white collar crime to encourage local and foreign investment into debt capital markets, government has to ensure that the legislation and regulations that govern the debt capital markets comply with international standards.

General debt capital market infrastructure is important. It is essential to develop an appropriate infrastructure for a debt capital market, which among others consist of financial intermediaries or an inter-dealer broker network to support the bond market and promote liquidity, a platform for electronic trade capture and matching, an efficient settlement system that meets the bank for international settlement recommendations.

Others include a central security depository to facilitate transfer of ownership of scrip, centralised distribution of market information and a centralised pool of liquidity such as central and transparent price dissemination from a central platform. Macroeconomic volatilities, weak governance, poor data collection and data quality, inadequate legal framework for debt management, underdeveloped local market, narrow investor base, and low sovereign credit rating still remain challenges of the bond markets in African sub-region.


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