FG’s plan to issue domestic dollar bond may pressure naira – IMF

The International Monetary Fund (IMF) has expressed concerns over the Nigerian government’s strategy to issue domestic dollar-denominated bonds, according to the recently published IMF staff country report for Nigeria.

The Fund warns that this move could exacerbate pressures on the naira and elevate the costs associated with naira securities.

FG Revises Medium-Term Debt Strategy

The report noted the federal government’s plan to revise its Medium-Term Debt Strategy, developed in collaboration with the IMF and World Bank Capacity Development (CD).

The revision aims to bolster the issuance of medium-term securities and Eurobonds while maximizing multilateral and bilateral support.

The report read: “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 maximizing multilateral and bilateral support.

“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.”

Risk of market fragmentation

The IMF also noted that the federal government’s plan to introduce domestic foreign exchange securities, intended to enhance dollar liquidity in the official market, could fragment the market.

The IMF advised the Central Bank of Nigeria (CBN) to develop a foreign exchange intervention framework to mitigate excessive volatility in the naira, given the limited depth of Nigeria’s foreign exchange market.

The report stated: “Domestic issuance of FX denominated government securities 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.”

More Insights

• It was earlier reported that the federal government plans to begin the issuance of domestic bonds denominated in foreign currency starting from the second quarter of this year.
• The Minister of Finance, Wale Edun, announced the government’s plan to market foreign exchange bonds to Nigerians both at home and in the diaspora.
• Edun explained that the delay in issuing the bonds was due to the government’s desire to establish confidence in its fiscal strategy and earn the trust of citizens who are sceptical of government policies.
• If the government proceeds with the domestic dollar bond issuance in the second quarter of this year, it may be at a time when the naira is struggling against the US dollar.
• The exchange rate between the naira and the dollar closed the week at N1,466/$1, reaching a two-month low as a stronger dollar continues to outpace global currencies.
• The exchange rate has now weakened by a significant 26.8% since reaching its strongest point of N1,072/$1 in April when it was declared the best performing currency by the apex bank.
• The closing rate of N1,466/$1 marks the lowest level the naira has touched since March 20th, when it was at N1,492/$1. This confirms that all the gains recorded in April have been erased.
• The exchange rate strengthened to a yearly high of N1,072/$1 on April 17th, providing a glimmer of hope for many Nigerians that the central bank’s forex policies were effective.
• This peak coincided with the Central Bank governor’s press briefing at the IMF, where he stated that there was no intention to defend the naira following a drop in external reserves.
• Nigeria’s foreign exchange (FX) reserves had maintained over a one-month dip streak, reaching a low of $32.12 billion on April 17, 2024.
• Following several weeks of a downward trend, Nigeria’s foreign exchange reserves are currently on a rise with the value of the naira moving in an inverse direction.