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FG as bond subscribers’ money tree

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Ms Patience Oniha, Director-General, Debt Management Office, Nigeria


The Debt Management Office (DMO) in December 2018 re-offered for subscription two-year and three-year Federal Government savings bonds at the coupon rates of 12.402 per cent and 13.402 per cent respectively. The former bond was first issued in March 2017 and the latter a month after but both at slightly lower coupon rates than currently. As at 30/6/18, the DMO put the value of both bonds at N8.52 billion or 0.07 percent of Federal Government domestic debt stock. But media reports indicate that by end-September 2018, the value of both bonds had sunk to N2.54 billion, a drop of 70.9 percent. Similarly, the peak 5,849 subscriptions in 2017 had thinned down to 1,108 by September.

It is necessary to examine the savings bond in proper context. Firstly, the bonds were issued amidst high inflation and tight monetary policy stance, which exerted and continue to exert contractionary economic effects. Thus, the 12-month average inflation during March 2017 through August 2018 ranged from 13.55 per cent to 17.63 per cent thereby rendering the coupon rates negative in real terms. So the bonds perhaps helped mitigate but did not better the lot of subscribers. Little wonder that most of the 2017 subscribers chose the earliest opportunity in the third quarter 2018 to convert their securities into cash when confronted with high inflation, low non-inclusive economic growth and dwindling purchasing power.

Secondly, the savings bonds were touted as a means of promoting inclusiveness, deepening the national savings culture by extending to low income earners the opportunity of contributing to national development. But as it turned out, the initial subscribers for the most part simply transferred savings lodged in deposit money banks (where they earned on average 4.0 per cent annual interest rate) to Federal Government savings bonds with coupon rates of 13.01 and 14.01 per cent.

Hence there was no deepening of the savings culture. Rather through the savings bonds, the DMO merely engaged in unproductive and unfair competition with DMBs. Thirdly, by attracting savings from DMBs to risk-free government bonds bearing coupon rates that were more than triple DMB savings interest rate (and considering that government spending is largely wasteful), the DMO simply brought subscribers to “come and eat” by partaking in profligate squandering of federal revenue.

Fourthly, unlike DMO’s implicit position, funds held by bank depositors in savings accounts contribute far more to national development than deposits moved into the savings bonds. DMBs ordinarily rely on savings (broadly defined) for lending to various productive sectors of the economy whereas government borrowings are generally dissipated.

Despite the unconvincing reasons for issuing the initial savings bonds, the DMO in December again invited fresh subscribers to “come and eat” at very high interest rates under the 2018 two-year and three-year savings bonds. Elsewhere, during the presentation of the Regional Economic Outlook for sub-Sahara Africa in November, the DMO Director-General was not moved by IMF admonitions that at over 50 per cent of government revenue, the country’s debt service cost was inimical to federal budget implementation. Instead the Director-General defended borrowing on the grounds, one, that borrowing had been necessary for the Federal Government to spend its way out of the 2016/17 economic recession; two, that external borrowing facilitated increase in forex availability; and three, that the proposed 2019 borrowings would reduce to N1.5 trillion, down from N2.5 trillion in 2016.

The basis for DMO’s pro-debt fixation is the 2016-19 Debt Management Strategy (DMS). It was put together by the DMO, the Federal Ministry of Finance, the Federal Ministry of Budget and National Planning, the Central Bank of Nigeria and the Office of the Accountant-General of the Federation. Unbelievably, in the DMS the aforenamed MDAs self-servingly painted a beggarly Nigerian economy that “is currently under severe revenue pressure arising from a volatile macroeconomic environment (VME).” Under the pretext of financing the FG budget needs at minimal cost, the DMS advocated rebalancing the public debt portfolio away from domestic financing in favor of relatively cheap long-term external financing. Actually the VME is caused by CBN’s improper substitution of pro-rata fiat printed naira amounts for Federation Account dollar allocations which the apex bank has been withholding contrary to the annual Appropriation Acts thereby excessively raising the fiscal deficit level, precipitating excess liquidity and fuelling high inflation.

Consequently even at three times the average DMB savings interest rate as earlier noted, the “come and eat” coupon rates of the 2017 savings bonds were negative in real terms just as the naira’s purchasing power weakened to compound the pervasive hardship. For the sake of completeness, there are other VME-induced avenues for pouring federal revenue down the drain at the expense of the taxpayer such as, one, FGN Bonds and Nigerian Treasury Bills (both instruments accounted for 97.78 percent of Federal Government domestic debt stock of N12.15 trillion in June 2018) attract “come and eat” coupon rates which are higher than the rate of inflation and so making them positive in real terms. The generous coupon rates are generally more than four times the average DMB savings rate. Two, at nearly two times DMB savings interest rate, Eurobond coupon rates also represent invitation to subscribers to “come and eat” from the federal forex (money) tree.

Three, dollar domiciliary account holdings and forex dealerships totally rob FG of humongous forex access tax receipts. In effect, the DMS is a scheme to siphon federal revenue through sundry local creditors and mostly Nigerian dollar-wielding loan sharks alongside dollar domiciliary account holders.

Yet, the unbiased economist does not require any preachment that strict observance of the provisions of the Appropriation Act would yield an economy which would routinely gush revenue surplus. Even the DMO reveals such realization through its disclaimer of responsibility for FG debts by stating “that the DMO can borrow for the country only in accordance with the Appropriation Act”. Therefore, the MDAs which purposively crafted the 2016-19 Debt Management Strategy should recant and immediately terminate all further borrowings. As long as the MDAs play their allotted roles in accordance with the Appropriation Act, the country would not be under any revenue pressure.

Towards that end, it suffices to state, firstly, that under normal budget implementation process, approved budget borrowings should be effected in the last resort to supplement realised revenue. It is therefore unacceptable for DMO to unreflectingly borrow sums that are provisionally approved in the Appropriation Act while government-owned enterprises fail to remit realised federal revenue (operational surpluses or whatever) amounting to some N2 trillion to the public kitty as the Budget Office recently disclosed.

Secondly, stripped of the extraneous CBN-created volatile macroeconomic environment, the actual economic environment expected from the Appropriation Acts over the years would be characterised by conducive and production-friendly conditions with a stable exchange rate centered on the Appropriation Act exchange rate, low inflation within a range of 0-3 per cent and internationally competitive lending rates. For example, bank interest and bond coupon rates of 4.0 per cent would be positive in real terms thereby facilitating low-cost domestic borrowing (if need be) by government. And there would be self-sustained rapid growth and development.

All in all, through the deliberate government revenue-draining debt strategy and refusal to remit generated revenue to the public kitty, the MDAs have shown that responsibility for national interest-imbued implementation of the Appropriation Act rests on the political will of the President together with the relevant committees of the National Assembly.


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