March 10, 2016

FG to raise N100bn in local currency denominated bonds

FG to raise N100bn in local currency denominated bonds

CBN Governor, Mr Godwin Emefiele

By Emeka Anaeto, Economy Editor

LAGOS — In pursuit of its borrowing plans for budget deficit funding, the Debt Management Office, DMO, yesterday, said it would raise N100 billion in local currency denominated bonds on behalf of the government next week.

CBN Governor, Mr Godwin Emefiele

CBN Governor, Mr Godwin Emefiele

This came against the plan to raise about N390 billion in total local borrowing by end of this quarter, less than three weeks from now.

This is also expected to be tied to the total borrowing plan for N984 billion local bond issue in 2016 fiscal plan.

A breakdown of the instrument shows that a N40 billion worth of the bond will be issued with a maturity date in 2036, another N40 billion of the paper maturing in 2026 and the balance N20 billion of the debt maturing in 2020.

About N60 billion worth of the instrument with 2026 and 2020 maturity dates are re-openings of the previously issued papers, while the 2036 dated instrument is a fresh issue.

In the first debt auction of this year, which took place January 20, 2016, the DMO issued N40 billion and N60 billion of bonds maturing in 2020 and 2026.

The 2020 debt is a re-opening of a previously issued instrument, while the 2026 debt is a new issue.

DMO said it will issue between N40 billion and N60 billion in fresh instruments in each of the first three months of the year.

The Federal Government plans to raise N984 billion in domestic borrowing and N900 billion from foreign debt market to fund the N2.22 trillion deficit in the N6.08 trillion 2016 budget.

The deficit will take the country’s overall debt profile to 14 per cent of the gross domestic product, GDP.

Financial analysts believe that government might increase its domestic borrowings due to budget funding gaps and likelihood of failure in the foreign debt market due to policy gaps between the government and the international financial markets over exchange rate policy.

Moreover, the attraction to leverage domestic market is high with high liquidity in the banking system which had pushed over-subscriptions in the domestic debt instrument issues.


CBN’s c’ttee member faults FG borrowing plan

In a related development, a member of the Central Bank of Nigeria’s Monetary Policy Committee, MPC, Abdul Ganiyu Garba, has said the government could not be planning to borrow N2.2 trillion on an ill-perceived premise that debt to GDP was still low and that there was room for more borrowing.

The CBN’s MPC is the highest policy making organ for monetary policies in the country.

In the communiqué of the January session of the committee, issued yesterday by the apex bank, Garba raised concerns over the crowding out of private investors when government was borrowing much.

According to him, that is what caused the debt crisis of the 1990s which led to the Paris Club deal. He also offered an advice to the government to judiciously use the TSA savings rather than focus on borrowing more.

In his words: “The implications of a planned increase in public debt by over N2.2 trillion will become obvious: increase in debt from N10.5 trillion to N12.7 trillion, crowding-out of private borrowers, including small and medium scale firms that have higher growth and employment elasticities, a rise in interest rates, adverse effects on investment, hence employment and growth and the likelihood that debt service in the 2017 budget would significantly exceed the 22 per cent of the proposed 2016 budget.

“It is worth noting that after Nigeria exited the Paris Club in 2006, the total federal debt was N2.1 trillion which is well below the borrowing plan for 2016. The borrowing plan will continue a trend that picked up in 2009 during which total federal debt almost quadrupled from N2.8 trillion to N10.5 trillion. Raising the debt by another N2.2 trillion clearly needs much more detailed analysis of the implications for policy effectiveness.

“An ongoing study has shown that had domestic debt risen along the 1981-2006 trend, government expenditure, total debt service and budget deficit would most likely have been significantly lower while private sector investments, credit to private sector and real GDP growth would have been significantly higher than they were.”

“The results imply that excessive public borrowing was harming private investment, employment and real growth while creating and worsening a fiscal problem.

“Available information indicates that the Treasury Single Account has a balance of over N2.2 Trillion. If supplemented by recoveries either from voluntary returns or legal successes on the “war on corruption” and more effectiveness in the budget design and implementation following strictly provisions of the Fiscal Responsibility Act, 2007, there is a great likelihood that the problem of fiscal deficit should be significantly reduced in 2016.

The idea that we are below a threshold and should continue to borrow led Nigeria to a debt overhang problem that took more than half a century (1982-2006) to resolve at very high economic, social and political costs.  To rely on the same idea to worsen the triple problems (fiscal deficit, current account deficit and a growing debt problem) is to fail to learn from history and to worsen the likelihood of efficient and effective policies.

“It is important that fundamental errors are avoided and key vulnerabilities are positively addressed otherwise, the policy environment will remain challenged by structural problems, psychological instabilities (greed-fear-worry) and by avoidable strategic and policy errors whose effects are systematic and long termed”.

In the communiqué CBN reported that net domestic credit, NDC, grew by 12.13 per cent in the fourth quarter of 2015, but remained below the provisional benchmark of 29.30 per cent for 2015.

But the growth in aggregate credit reflected mainly growth in credit to the Federal Government by 151.56 per cent in December 2015 compared with 145.74 per cent in the corresponding period of 2014. CBN said the renewed increase in credit to government may be partly attributable to increased government borrowing to implement the 2015 supplementary budget.