The Debt Management Office (DMO) in the first half of the year raised N347.05 billion through the local debt market, a far less amount compared to what it raised between January and June last year as the country strives to cut back local debt.
The amount raised through the federal government bonds (FGNBonds) and the federal government savings bond (FGNSB) dropped alongside the yields on the debt papers. Director-general of the DMO had earlier in the year announced plans by the federal government to reduce domestic borrowings.
While the DMO had sustained its monthly FGN and savings bond issuance, the amount raised through the issuance had declined by 59.4 per cent when compared to N854.28, which it raised through both bonds in the first half of 2017.
Nigeria’s domestic debt as at March 2018 had reached N22.7 trillion with most of it made up of high-interest credit. The DMO said the government is working on a strategy to reduce domestic debt to 60 percent of the total, from 73 percent as way of reducing government’s debt-service costs, lowering of interest rates in the domestic market and improving the availability of credit facilities to the private sector.
Between January and March this year, the government had spent N643.63 billion on servicing its local debts compared to N474.06billion which it spent on servicing its local obligations in the first three months of 2017. Funds raised by DMO through the FGN Bonds dropped significantly from N849.53 billion in the first six months 2017 to N345.73 billion in 2018. Investors’ interest in the FGN Savings Bond declines sharply as the amount raised through the bond between January and June 2018 stood at N1.32 billion as against N4.75 billion that was raised between March and June 2017.
Average yields on the FGNSB had declined from 13 per cent last year to 11 per cent this year as the amount raised at each auction declined progressively. At the debut auction held in March last year, the DMO had raised N2.06 billion through the two year bond but as at last month, the amount raised through the 2- and 3-year bond was N368.28 million.
Likewise, average marginal yields on the FGN Bonds had declined to 13 per cent from 16 per cent as the average amount raised at the monthly bond auction dropped to N70.9 billion in the first six months of 2018 from N141.6 billion in the comparable period of last year.
Analysts at Chapel Hill Denham in a note to clients said the planned reduction in domestic bond issuance further reflects the “federal government’s reduced reliance on domestic borrowings post the successful Eurobond issue and we expect yields on FGN bonds to fall accordingly.”
However, analysts think the Central Bank of Nigeria (CBN) will try to bridge the paper supply shortfall by maintaining issuance of Open Market Operation (OMO) bills to sterilize excess liquidity in a bid to cultivate offshore participation in domestic debt.
The CBN has maintained the issuance of OMO and Primary Market Auctions albeit at lower rates to manage liquidity in the system. According to a member of the CBN Monetary Policy Committee, Hassan Balami, if fiscal policy is pumping liquidity into the economy, as he noted that the CBN had to sell dollar in the market to mop-up.
“In the last three weeks of April 2018, more than $500 million was sold. This happened for two reasons; the lack of instrument of high interest rate for foreign investors and outflow of funds to the United States of America encouraged by rising interest rate.”
On her part, another member of the MPC, Aisha Ahmad said the fiscal rebalancing is commendable. “Whilst the growing total sovereign debt stock must be prudently managed, efforts at restructuring domestic versus foreign debt stock are applauded, especially as it portends to reduce debt service costs, reverse crowding out in domestic debt markets, and improve the fiscal financial condition.”
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