By Ahmed Yusuf
A popular saying has it that a stitch in time saves nine. This saying correctly explains the $500 million Domestic Bond the Federal Government of Nigeria has floated to stabilize the exchange rate and boost the country’s foreign reserves. It is part of the efforts the Tinubu administration is making to get the economy quickly on a sound footing to bring about the urgently needed recovery and growth. The recovery may be slow, but it is safe to say, as Mr Wale Edun, Finance Minister and Coordinating Minister for the Economy has said at several events and fora, that the administration’s reforms are working.
The domestic bond, which has a tenor of five years with a minimum of $10,000, is targeted at Nigerians in the Diaspora with foreign currency savings, those at home with domiciliary accounts and foreigners resident in the country, to allow for broader participation. This is an opportunity for Nigerians and foreigners alike to invest in a bond that is not only safe and secure but also has the certainty of bringing a bountiful harvest, especially since it is to be listed on the FMDQ and the Nigerian Exchange Limited.
With a 9.75 per cent return on the bond, investors – institutional and individual – see the investment as being of relatively lower risk with high return, compared with dollar-denominated investments in the domestic market which come with lower returns. This has excited investors, and there are indications the bond will be fully subscribed by Friday, August 30, 2024, when the offer is expected to end. With increased dollar inflow into the economy, there is going to be a reduction in demand for the greenback and increased confidence in Nigeria’s domestic market.
The objectives of the bond, apart from boosting foreign reserves and stabilization of the exchange rate, include making liquidity available for borrowing by investors and manufacturers to increase productivity, job creation and reduction in the unemployment rate. This is in addition to the need to make money available to the government for funding of key social services like health and education, and the massive infrastructural development plan of the administration, which includes building new roads and rehabilitation of the many that have literally collapsed across the country. The government’s announcement that it has no plan to initiate any new infrastructure projects in 2025, but to focus on completing the ones it has started and rehabilitating those that are in various states of disrepair, resonates well with Nigerians who want dilapidated roads across the country to be made usable.
The need for an intervention like the dollar-denominated domestic bond that was launched on Monday, August 19, 2024, must therefore be viewed within the context of the benefits it would bring to the country. It is worthy of mention that a foreign-denominated bond beefs up the local currency and makes more money available for borrowing by investors, to go into key sectors like agriculture, manufacturing, oil and gas, construction, transportation, etc. These are the areas in Nigeria that urgently need intervention because they are the areas from which economic recovery and growth are going to come.
For too long, the country has been almost entirely import-dependent, producing virtually nothing for export to earn enough foreign currency to stabilize the exchange rate. No country achieves economic growth and, by extension, development, when it does not produce for export. As a corollary, no country develops when it imports almost everything it consumes. An injection of $500 million is going to bring about a massive boost to the economy by shoring up the naira.
The decision to denominate the domestic bond in dollars is quite strategic. It saves the country the trouble of incessant external borrowing which was the bane of development under the Buhari administration. Now, the government has an opportunity to earn the much-needed foreign exchange to help boost reserves and stabilize the exchange rate without resorting to borrowing from external sources. This should be considered against the background of the strident efforts it is making to repay some of the existing foreign loans.
It is quite appropriate that the chief marketer of the domestic bond is none other than Edun, who has brought energy into the government’s drive to stabilize the exchange rate, right from the inception of the current administration. Edun has been very optimistic about the outcomes of the administration’s economic reforms, not missing any opportunity to voice this out, perhaps more than President Tinubu, his principal, has done.
At a roadshow in Lagos to unveil the bond, the minister pointed to the successes recorded through a combination of the government’s monetary and fiscal policies, which have manifested in the form of foreign portfolio investments and foreign direct investment, the latter being more evident in the oil and gas sector. His argument, which hits the nail on the head, is that more foreign exchange leads to higher foreign reserves and a stronger exchange rate. This argument finds favour in the fact that as of August 12, 2024, Nigeria’s foreign reserves stood at $36.62 billion, according to statistics released by the Central Bank of Nigeria. The figure supports Edun’s position on greater foreign exchange inflow into the country in the last few months.
The $500 million domestic bond has come at a time when it is most needed. We can only hope that like other policies that have started to show positive signs, its objectives would be seen in the short run on the exchange rate and foreign reserves, before others become evident in the long run, in areas such as prices of manufactured goods, job creation and improvement in the standard of living of the people.
Yusuf, a public affairs analyst, wrote from Abuja