Domestic Capital Market as New Haven for Resource Mobilisation

Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed


James Emejo aggregates opinions of analysts on the federal government’s resolve to jettison the Eurobond and explore other viable means of funding its budget deficits and financing capital projects

There is a general consensus that the country must spend its way out of the current economic quagmire in order to return to the path of recovery and growth.

But the situation is further compounded by the fact that the economy is presently faced with acute revenue crisis as severally attested to by top government officials lately.

Crude oil, which provides more than 80 per cent of government’s revenue has dwindled dramatically in the wake of the global fiscal crisis occasioned by the outbreak and spread of the COVID-19 pandemic, leading to demand slump and major fall in oil prices.

As a result, borrowing has remained one of the immediate available options for the government to bridge its fiscal deficits.

However, with Nigeria’s public debt stock at N31.01 trillion as at June 2020, with debt service obligations at N921.9 billion for local debts and and N288.6 billion ($759.6 million) on foreign debts, bringing the total to about N1.21 trillion, according to data from the Debt Management Office (DMO), analysts believed it was high time the country exercised restraint over future borrowing.

Yet, borrowing is not entirely bad in itself if the resources are committed to developmental programmes for the overall beefits of Nigerians- a major shortcoming in the country’s borrowing pattern in recent times as analysts argued that debts are most often siphoned by politicians.

President Muhammadu Buhari, during the presentation of the N31.08 trillion 2021 Budget proposal, termed, “Budget of Economic Recovery and Resilience”, to the joint session of the National Assembly, stated that the N5.20 trillion deficit will be financed mainly by new borrowings totalling N4.28 trillion including N205.15 billion from privatisation proceeds and N709.69 billion in drawdowns on multilateral and bilateral loans secured for specific projects and programmes.

Also debt service obligations in the proposed budget which is currently before the legislature is valued at Debt Service of N3.124 trillion, while oil revenue is projected at N2.01 trillion as well as Non-oil revenue estimated at N1.49 trillion.

However, Vice President Yemi Osinbajo, citing associated expense, recently foreclosed further issuance of the Eurobonds to raise funds to finance the budget, adding that the government will rather explore other means to mobilise funds including seeking credit from the World Bank amidst the impact of the COVID-19 pandemic as well as an imminent recession confronting the economy.

The government’s decision came despite a track record of successes of the eurobond issuance in the international market.

In 2018, Minister Finance, Budget and National Planning, Mrs. Zainab Ahmed said that the country’s 2018 Euro bond, which was the sixth since 2011, was three times oversubscribed.

This followed the approval by the National Assembly for the issuance of $2.786 billion from the International Capital Market to partly finance the 2018 budget.

Following the success recorded, the minister had said:”In a demonstration of confidence in Nigeria’s economy, the $2.86 billion Eurobond road show in London was oversubscribed three times from leading global institutional investors with a peak combined order book of over $9.5 billion.

“The Eurobond oversubscription is owed largely to Nigeria’s successful engagement with the Fitch Rating Agency. The agency had changed the outlook on Nigeria’s sovereign rating from B+ (negative) to B+ (stable), based on improving macro-economic fundamentals.”

However, analysts have backed the government’s decision to stay away from the international capital market amidst the fiscal challenges facing the economy.

In separate interviews with THISDAY, they believed eurobond which often attracted high yields with be too costly for a fragile economy, urging the government to consider sale of its moribund assets among other things to fund its budget instead of seeking to borrow more.

Analysts, however, said the nation’s capital market provides a veritable source of cheaper funding for government if it must borrow at this critical time.

Managing Director/Chief Executive, Credent Investment Managers Limited, Mr. Ibrahim Shelling, told THISDAY that with bearish oil prices, foreign exchange liquidity is currently stretched, adding that eurobonds may not be the best option to finance government expenditure going forward.

He said while the capital market is ripe for government to access funds because with low yields in fixed income, investors are looking for options and are willing to invest at lower rates.

Shelling added that the government also needed to engage private sector to create structures, stressing that Sukuk bonds can be used for infrastructure projects.

Explaining why the government may be currently averesed to eurobond, he said it was important to understand that, “Eurobonds attractive to investors, the rates offered have to be competitive. Eurobonds are dollar-denominated bonds and coupons are paid in dollars. Therefore a devaluation of the Naira automatically increases the cost of the bonds.”

According to him, other options available to the government to raise funds include privatising some moribund government assets.

Also, an economist, Dr. Muhammad Rislanudeen, said though eurobond rates are high and repaymeant tied to the capacity of the country to generate more foreign exchange from exports, the government should desist from persistent borrowing to meet up with annual budget deficits, but rather explore and incentivise the public private partnership arrangements particularly for capital projects.

He said given that eurobond is largely depended on oil export for foreign exchange revenue, vulnerability to external shocks in terms of vagaries of unpredictable change in price of the crude oil could impact negatively on the country’s capacity to honour obligations and meet up with local demand.

Rislanudeen said:”This problem is further accentuated by the current COVID-19 pandemic. Increased appetite for local borrowing will simply jerk up the rates in the fixed income market as witnessed in 2016 and 2017.”

On his part, Professor of Capital Market and President, Capital Market Academics of Nigeria, Prof. Uche Uwaleke, said amidst the current economic reality, the domestic capital market provides a veritable source of financing government deficit if the right instruments are used.

Specifically, he said the government should explore options in infrastructure bonds particularly Sukuk as well as Green bonds to fund environmentally friendly projects that most times are self liquidating and hardly add to the debt burden.

According to the former Imo State Commisioner for finance:”Eurobonds are not contracted on commercial terms. They are non concessional loans and are therefore relatively expensive. Eurobonds exposes Nigeria to exchange rate risk.

“The government should focus on increasing non oil revenue by getting the revenue collecting agencies to widen the tax net and improve collection efficiency. Efforts should also be geared toward plugging revenue loopholes and ensuring that MDAs remit to the Treasury every Kobo that belongs to it.

“I also think a lot of money can be made through privatisation of government enterprises. The country cannot afford further loans until the revenue challenges are sorted out.”

Also commenting on the development, an Associate Professor of Agricultural Economics at University of Port Harcourt, Anthony Onoja, pointed out that the decision of the federal government to discontinue the use of eurobonds was a step in the right direction as this would return the country on the path of economic recovery and growth following the twin challenges of COVID-19 and the recently #ENDSARS crisis.

He said the government must embrace entirely new approaches to adapting to the crisis by leveraging on incentivising the use of emerging and existing technologies especially in the ICT space to adopt innovative financing models.

He said:”In Nigeria for instance some universities and schools have massively introduced online education. The public universities and schools are yet to see such reforms. Nigeria needs massive infrastructural development to adapt. This is one point of contention in the current crisis between the Federal government and Academic Staff Union of Universities (ASUU). In the SMEs, we see many restaurants in Nigeria too now are delivering meals and drinks for the first time using online platforms. Supermarkets and shops are also adapting their business models.”

According to him, “Governments should not try to save the old models and methods which they believe keep economies running. Instead, Nigerian government authorities should aim to embrace new models that have emerged in times of crises. Creative destruction has been identified as a driving force of economic growth which compels countries to look at the status quo and drastically reform it instead of trying to save it as it is.

“Improved tax regimes e.g. progressive taxation (taxing those in very high income groups higher), building of correct data base to capture businesses that are evading taxes and ensuring tax evasion are minimized to its bares level can go a long way in generating funds to finance Nigerian economic growth and recovery plan. The stock markets also needs more reforms to remove barriers against participation by investors.”

Onoja added”Eurobonds patronage is a mega blow to incentivising economic growth in any country.

Eurobonds, are sometimes referred to as ‘coronabonds’ due to the fact that coronacrisis, have made it attractive as instruments that allow governments to jointly finance debt.

“The draw back is that for financially stronger member states, the cost of funding these increases when weaker member states are able to leverage their creditworthiness, which in turn removes an important incentive for these countries to implement sound fiscal policies in the long term. This is why Germany and the Netherlands have been openly opposed to use of Eurobonds as financing instruments.”

According to him, Eurobonds do not offer incentive for economic improvement. Eurobonds has the potentials of preventing countries from attaining higher growth plans, studies have shown. For instance, recently Spain has proposed using perpetual bonds to finance a European recovery fund instead of Eurobonds but this option is not also the best.

“The only difference between perpetual bonds and Eurobonds is that national governments directly guarantee Eurobonds and indirectly guarantee perpetual bonds via a joint European budget. However, the bottom line is that both bonds do not provide any incentive to structurally improve economic stability after a crisis, nor do they serve as motivation for economic growth. Growth which will be essential to carry the financial burden the corona crisis has brought will require more sustainable options.”

Onoja said as a result of the enormous public debts, it is essential that the growth rates of the country be higher than their interest rates.

He said, OK I’ll John”I am not sure if this has been the case in Nigeria. Nigeria will have to focus on growth in order to finance the large debt the country will undoubtedly have after the crisis. The corona crisis, like other past crises before it, is known to be disruptive in terms of Schumpeter’s process of creative destruction: i.e. old techniques making way for new ones.”