Reading the lips of securities dealers
The Honourable Minister of Works and Housing, Babatunde Fashola (SAN) and two-term Lagos State Governor has goofed. On the sideline of his recent inspection of the two bridges built by the Federal Government in Cross River State, the trained lawyer who suddenly became an engineer during the first term of the present Administration has also become a public finance ‘expert’ by his verbal assault on the government’s critics on incessant borrowing. Fashola lampooned the critics that ‘It is Home Economics they know; they don’t know Public Finance’.
He emphasized that government borrowed to execute specific projects. Nigeria’s total debt has reached an all-time high of N33.107 trillion and is tending to a red flag as ratio to Gross Domestic Product (GDP). If government continues at the current level of borrowing, it will plunge the country into bankruptcy. The warped thinking of the government about borrowing to finance infrastructure has deprived the financial market of government participation.
On the lips of Securities Dealers is the shock and disbelief that the government can exhibit such level of apathy towards the market. Regardless of different perspectives of economists about the concept of financial market, it is settled in Corporate Finance that the market exists to bring people together, so that money can flow from the surplus economic unit to deficit one.
Financial Market provides finance for companies so they can hire, invest and grow. The market also enables the government to raise funds to build infrastructures, including road networks among others. This saves the government the ordeal of incessant borrowing. There is no argument on the imperative of infrastructure as the cornerstone of any economy and there is a nexus between the economy and its financial market.
All economic sectors need infrastructure to operate optimally and this will enhance employment generation as well as upward trajectory in the growth of GDP. The United States is in dire need of $ 6 Trillion to overhaul its infrastructure. Rather than opt for reckless borrowing, the country is considering Build America Bond (BAB) as a key financing option. Turkey has for a long period believed that financial market is not a mere option but a must to raise fund for projects.
Let us discount Barrister Fashola’s declaration and celebration of outright borrowing as his own public finance model. The Nigerian capital market has largely remained untapped and everyone in the Government’s Economic Teams at various tiers knows the relevance of the financial market to economic growth and development. Many state governments and some local government councils in Nigeria had at different periods accessed the capital market to raise medium and long term funds for infrastructural development. The option is a no-brainer.
It is on record that many landmark projects, including privatization of public enterprises and recapitalization of banks had been executed through The Nigerian Stock Exchange (Now NGX). In 2019, the Federal Government floated N100 billion sovereign Sukuk Bond to construct 642.69 kilometers roads across Nigeria. The offer was oversubscribed because it is gilt- edged, backed up by full faith and credit of the government. The risk is of default is minimal if not non-existent. Investors are always on the queue for such an asset class. It is a win-win affair for the government, the securities market and investors. For instance, money realized from toll gates shall be ultimately utilized to pay back the subscribers to the bond. What happened to continuation of the bond issuance?
In the past, many developing countries finance infrastructure by government revenues. But over the years, the trend has changed because of the huge monetary involvement. Financing public projects is better achieved through issuance of bonds and collaboration with the private sector.
However, deployment of the financial market for long-term fund requires a supportive institutional framework by way of pension funds, insurance companies and other institutional as well as individuals investors with legal ability to purchase such securities under a favourable macroeconomic outlook in terms of moderate inflation rate, exchange rate and currency value to moderate large risk- premium. Although institutional investor sometimes contend with the issue of investing short term assets in long term project, a case of mismatch, the risk and return trade off often spurs their interest.
Annually, Nigerian Securities Dealers, through the Chartered Institute of Stockbrokers (CIS) organise National Workshop and Conference to articulate policies that will move the economy forward. Every event attracts top notch professionals from in Nigeria and abroad to dissect the economy and propose the way forward. But prophets are not respected by their people. None of the timeless communique issued at the end of each event has been implemented by the Federal Government.
To be continued tomorrow.
Oni, communications consultant, Chartered Stockbroker and Commodities Broker, is the chief executive officer, Sofunix Investment and Communications.