Nigeria raises N106bn from local bonds at high 16.25% amid gloomy outlook on revenue

Nigeria’s Debt Management Office (DMO) Wednesday raised about N106 billion through the Federal Government of Nigeria (FGN) Bonds. The 5, 10 and 20-year bonds denominated in the local currency were sold at an average 16.25 percent interest liability, same as the prevailing inflation rate, according to the auction data seen Thursday.

The N106 billion raised is expected to support the implementation of the Federal Government’s N7.44 trillion 2017 budget, which has an allocation of N2.36 trillion to capital expenditure.

The high borrowing is coming at a time revenue outlook is gloomy as oil prices, from which it relies on for about 70 percent of its funding are seen to remain flat or even decelerate. Equally non-oil revenues are running below projection.

A recent Central Bank of Nigeria (CBN) data indicate that the N252 billion non-oil revenue flows into the federation account in February were 49 percent below the projection in the 2017 budget proposals, just as analysts are saying that the under-performance of non-oil revenue collection indeed extended through to April.

According to analysts, higher interest rates on government bonds would also tend to push up other interest rates in the economy as depositors would be asking their banks to pay more on funds or divert investment to the fixed income sector and crowd out investment in the real sector.

For them, since government is borrowing high, government would have to look for ways to pay back and the obvious way is through raising taxes or expanding the tax base, and this is seen in the FG’s efforts to increase its non-oil revenue through its Voluntary Assets and Income Declaration Scheme (VAIDS).

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The scheme encourages voluntary disclosure of previously undisclosed assets and income for the purpose of payment of all outstanding tax liabilities. The Scheme will offer a limited waiver for declaration within the specified period of time.

Details of the auction indicate that total subscription was N129 billion, representing 96 percent of the amount offered. The 10 and 20-year Bonds were oversubscribed, showing investors preference for long-dated Bonds.

Based on the bids received at the auction, the DMO allotted a total of N106 billion and the rates were 16.24 percent for the 5-year, 16.25 percent for the 10-year and 16.2514 percent for the 20-year Bond.

At 16.25 percent interest, it means the bonds were sold at May inflation rate, which analysts are expecting to decelerate further in June. If the June figures indeed decelerate, government repayment obligations would be higher than the prevailing inflation rate, thereby increasing liability.