As the Federal Government gears up to issue a dollar-denominated bond in the domestic market, a professor of capital markets at the Nasarawa State University, Uche Uwaleke, has expressed some concerns about the issuance.

The don, however, said the bond holds great prospects for the economy.

The Federal Government will today begin the issuance of its dollar-denominated domestic bond targeting Nigerian savings in foreign currencies. The bond, which hopes to raise $500 million, is the first of its kind in Nigeria and is open to both local and foreign investors.

Uwaleke, in a position statement, acknowledged that the bond holds a lot of promise for the economy if well managed but noted that there are concerns that could undermine the bond.

“Notwithstanding the identified concerns, this bond holds a lot of promise to the investors and the economy in general in several ways including, that it provides an opportunity to earn risk-free return on investments given that dollar deposits with banks attract little or no interest the interest payable to bondholders is exempt from income tax.

“It allows retail and institutional investors to diversify their portfolios, and it also provides an alternative cheaper source to meet the government’s financing needs in a period where the cost of servicing domestic debt is made more expensive by hawkish monetary policy,” he said.

The issuance of the bond, he said, would help to strengthen the naira since the dollar raised will be available for intervention in the foreign exchange (FX) market.

He noted that a high demand for the debut bond will embolden the government to further explore the domestic dollar market, which will reduce the Federal Government’s reliance on naira bonds, thereby freeing up capital for the private sector.

“It promises to deepen the capital market following increased liquidity in the market on the back of the new asset class,” he said, adding: “Like the debut Eurobond issuance in 2011, the maiden domestic dollar bond is expected to open up local issuance of similar bonds by companies and sub-nationals.”

On the downside, Uwaleke, who is also the President of Capital Market Academics of Nigeria, said his major concern with the bond issuance is that the five-year tenor seems ambitious.

“A two-year tenor would have been better and less costly since this is a debut issuance designed to test the domestic market’s appetite for USD-denominated domestic bonds. It is instructive to note that when Ghana issued its first domestic dollar bond in 2016, it had a two-year tenor and it was largely successful,” he said.

He said another concern stems from the need to ensure that the exercise does not, as noted by the International Monetary Fund (IMF) in its Article IV Consultation report, put further pressure on the naira since part of the plan is to bring onshore dollar liquidity to the official market.

This, he said, “could lead to market fragmentation, increase the cost of naira securities, and add to pressures on the naira”.

He said it is important to prevent a situation where the parallel market is made a source of funds invested in these bonds, which speaks to whether there are adequate safeguards about the know your customer (KYC) principles given the nature of the transaction.

“For Nigerians in Diaspora in particular, a key consideration would be the effectiveness of the clearing and settlement infrastructure associated with the domestic dollar bonds issuance,” he said.