Alert: FG To Borrow $500M In Foreign Currency Bonds From Nigerians Abroad, Debt Crisis May Worsen

The Nigerian government has announced plans to issue $500 million in domestic foreign currency-denominated bonds within three to four weeks. Wale Edun, the Minister of Finance and Coordinating Minister of the Economy, announced this during a quarterly press briefing in Abuja on Thursday. Edun explained that the government will use the Nigerian financial system, including the Securities and Exchange Commission (SEC), banks, and investment bankers, to issue the bonds.

Recall that the Central Bank of Nigeria (CBN), on July 19, mandated financial institutions to transfer funds from all dormant accounts to the apex bank’s Unclaimed Balances Trust Fund (UBTF) Pool Account. This account will hold unclaimed balances and reportedly invest them in Nigerian treasury bills and approved securities. Additionally, the Nigerian government has imposed and increased several taxes. This includes a controversial 50 per cent windfall tax on banks, which is still under consideration. The bond issuance move is undoubtedly spurred by the desperate search for funds, especially with the recent implementation of a N70,000 minimum wage.

Bonds and Borrowing

Bonds are loans that investors give to the government, with the expectation of repayment with interest. In this case, the investors would be Nigerians living abroad or other interested international investors.

According to the Minister,  the government is ‘challenging Nigerians to bring their money home’. He clarified that the government has no immediate plans to raise Eurobonds, and the decision will depend on the success of the domestic foreign currency-denominated bonds.

How the Bond Issuance Works

The government issues bonds, i.e. promising to pay back the borrowed money with interest over a specified period. Investors buy these bonds, providing the government with immediate funds. The government use the money for various purposes, such as funding development projects or stabilising the economy. The government must repay the investors with the principal amount plus interest.

Potential Benefits of CBN’s Move

Attracting funds from Nigerians abroad can boost the country’s foreign currency reserves, which have significantly declined due to CBN’s strategy of selling dollars at low rates to induce naira appreciation. FX reserves can help stabilise the naira and support international trade. A successful bond issuance would also signal confidence in the government’s economic policies, encouraging further investment in Nigeria. Another positive angle is that the funds raised from bond issuance can be used for various developmental projects and infrastructure improvements.

A ‘Good on Paper’ Idea?

However, the International Monetary Fund (IMF) has expressed concerns about Nigeria’s strategy to issue foreign currency-denominated bonds. The IMF warns that this move could increase pressure on the naira and elevate the costs associated with naira securities.

Spelling out it simply, Prof. Ndubisi Ekekwe, a business analyst, said:

“The idea is good on paper, but this policy will destroy naira further… My point is simple: if you allow Nigerians to invest in USD to be paid interest in USD, people will sell naira to look for USD to invest in this bond. In other words, naira will weaken because this bond will put pressure on the local currency”.

The bond issuance strategy carries significant risks that could plunge Nigeria into more debt despite the possible benefits. This is mainly due to the nation’s current economic landscape, which is marked by unstable policies, naira volatility, high levels of inflation and insecurity,  and loss of confidence in the government. 

How The Bond Issuance Can Become a Debt Trap

Since the bonds are denominated in foreign currency, any naira depreciation could make repayment more expensive, increasing debt burdens. The official rate as of Saturday, July 27, is N1601.364/$. This is a N2 depreciation from the previous day and an outrageous decline from the average of N460/$ in May 2023 when the current administration began. The naira is set to depreciate further without critically evaluating CBN’s fiscal strategies. This would make the bonds expensive to pay off and scare investors off. Insufficient demand for the bonds could, in turn,  indicate a lack of confidence in the government’s economic management, leading to lower funds raised.

Relying on foreign currency bonds may create a dependency on external funds, which could be problematic in global economic or market conditions. Another major concern is the possibility of ineffective or non-transparent use of the funds. If funds gotten from these bonds are mismanaged – which is not unlikely- the economic challenges would exacerbated.

Bonds and a Suffering Economy 

It does not help that Nigeria’s public debt has surged by $4.95 billion in loans from the World Bank over the past 12 months. This escalated the nation’s total debt to N101 trillion. Despite this, the government anticipates fresh loan approvals totalling $4.4 billion from international lenders, including the World Bank and the African Development Bank (AfDB).

The decision to issue $500 million in domestic foreign currency-denominated bonds would likely plunge the country into more debt and hardship. The Finance Ministry and CBN must focus on developing a foreign exchange intervention framework to mitigate excessive volatility in the naira instead of taking more current loans.

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