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Dollar bond seen bolstering or battering naira - BUSINESSDAY

MAY 19, 2024

The Federal Government’s plan to begin the issuance of domestic bonds denominated in foreign currency from the second quarter of this year will put pressure on the naira, some analysts have said, while others believe it will be a good trade-off for dollar inflows.

Wale Edun, Nigeria’s finance minister said during a meeting with business executives in Lagos last month that the government plans to market foreign exchange bonds to Nigerians both at home and in the diaspora.

The International Monetary Fund (IMF) in its recent Article IV consultation with Nigeria said that the domestic issuance of foreign exchange-denominated government securities will put pressure on the naira.

“The government plans to issue domestic FX securities to bring onshore dollar liquidity to the official market, which could lead to market fragmentation, increase the cost of naira securities, and add to pressures on the naira,” the report said.

IMF said this is likely to lead to market fragmentation and weaken the transmission mechanism. “The CBN should develop an FXI framework to smooth excess naira volatility, given the shallow nature of the FX market.”

It said with monetary tightening and elevated external financing costs, interest expenditures will go up.

“The authorities are updating their Medium-Term Debt Strategy with IMF/WB CD, seeking to increase issuance of medium-term securities and Eurobonds, while maximising multilateral and bilateral support,” the report stated.

Since the liberalisation of the naira, the currency has witnessed much volatility plummeting to an all-time low of almost N2,000 to a dollar on the street while it exchanged for N1,600/$ on the official window by February ending.

This free fall of the naira resulted in Olayemi Cardoso, the CBN governor, swinging into action by mopping up liquidity and initiating policies to calm the FX market.

It witnessed a brief change in fortune emerging as the best-performing currency in March. The naira lost some of its gains to become the worst-performing currency in the world in April, a new Bloomberg report shows.

A dollar exchanged for as low as N1,515 on the streets Monday and opened at N1466 at the official market on the day, sliding from a peak of a little over N1,000.

Olaolu Boboye, lead economist at CardinalStone, an investment bank, said the issuing of the domestic dollar bond will be a trade-off as the CBN is after naira stability.

“We need adequate dollars supply to create stability in the market so the focus of the CBN is naira stability,”

“I think the CBN should issue the dollar domestic bond,” he said.

Nathanael Disu, an investment research analyst at Afrinvest Consulting, said that the Federal Government is using the planned domestic dollar bond issuance as a short-term approach to inject the much-needed FX liquidity into the system.

“But the challenge right now is that issuing a dollar bond would put more strain on the naira, as it would lead to more demand for the dollar by indigenous investors which would further weaken the naira,” Disu said.

He said that while the idea of the bond sounds good, it’s more of a case of solving a problem by creating another problem.

Since MPR was raised by 600 bps to 24.75 earlier this year, the apex bank has been adopting different short-term measures to inject FX liquidity into the system from OMO auctions and T-Bills sales to sales of FX to BDCs.

Disu said that the Federal Government needs to strengthen the naira by improving crude oil production, which is Nigeria’s biggest source of FX.

“Our production has declined significantly from about 1.4mbps in January to about 1.28 mpbd in April, which is way below our budget benchmark of 1.7mbpd,”

“We can see that there’s still no alignment between the fiscal and monetary policies. If the sales of T-bills and OMO auctions are supported by increased crude oil production, we would begin to see a stronger Naira,” he said.

Another Lagos-based analyst raised concerns about the amount and the rate on the bonds to be raised.

“Domiciliary account balances are estimated to be $30 billion; if you are issuing a domestic bond worth $30 billion, you are insinuating that everyone will drop their dollars, which is impossible,” he said.

“Secondly, you have $30 billion in reserves, why do you want to raise that large amount? At what interest rate will you service the loan,” he said


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