HISTORY AND PROSPECT OF THE NIGERIA GOVERNMENT BONDS MARKET
The study focuses on the development of government bond market in Nigeria. It explores the history, structure, performance and key issues related to the development of bond market with the broader context of domestic, regional and global bond market development. The Nigeria government bond market provides valuable lessons for other emerging market economies also seeking to build bond market. The sophistication of the local bond market is not enough to make it appealing to foreign borrowers. Market development demands an enabling market infrastructure and a background of macro-economic stability, diversified market participants, an appropriate regulatory and supervision environment.
1.1 BACKGROUND OF STUDY
The current administration’s commitment to rebuilding Nigeria’s dilapidated infrastructure as a catalyst for economic development has brought to the fore the need for a functional bond market given the developmental needs of the economy. The recent period of economy growth witnessed in Nigeria can only be sustained with continuous investment in infrastructure and the expansion of industrial output. The dearth of adequate financing has been identified as one key factor inhabiting this much needed investment in critical infrastructure such as down and mid stream petroleum distribution, telecommunication and transportation. Additionally, substantial long term financing would be required to rejuvenate Nigeria ailing power sector, it comatose refineries and the provision of socio-economic development in education and healthcare. Moreover, recent effort by the FGN to diversify the economic and make it more market driven means that funds would also be needed to expand existing facilities to meet the increased demand expected of a more efficient economy over the long term.
The Bond Market remains a fundamental financial market as risk pricing and investment valuation models rely on its data. While a functional domestic bond market is necessary for capital investment, monetary authorities also use bonds to define the yield curve and to ensure stability of short-term rates. An active sovereign prevents the economy from overheating as it allows large temporary overflows from the money market. The Bond Market therefore plays such a vital role in ensuring the health of the economy that the monetary authorities must be concerned with its structure and operation.
Internationally best-practice stipulates the existence of a public debt managing agency. Until 2000, no such agency existed in Nigeria. Whilst the Federal Debt Management Office (DMO) may have eventually been instituted, debt relief provided a critical spur, and ensured it was provided with sufficient resources to achieve the country’s goal of debt relief. This meant that a strong, capable debt management agency was created more quickly, and with greater public support, than it otherwise would have been.
Nigerian Bond market is principally regulated by the ISA and the Rules and Regulations of the Nigerian Security and Exchange Commission (SEC). Although the Nigerian Sovereign Bonds have been in existence since the 1970s, but was said to be inactive. Government issued paper was very short-term and limited in scale. Treasury bills had maturities of 91 days and below and this created inconsistencies and irregularities in the federal government’s borrowing costs. The DMO, in a bid to restructure the Federal Government of Nigeria’s deficit funding from shorter to longer tenured borrowing instruments, improve and lengthen the yield curve in the domestic money markets, and to encourage long-term savings, introduced the sale of Federal Government of Nigeria bonds in October 2003, with the launching of four Federal Government bonds of maturities ranging from three years to ten years. The bonds were sold to investors through all licensed banks and discount houses in the country. However, most of the investors adopted a “hold to maturity” approach and therefore little or no secondary trades were carried out.
The DMO extensively restructured Nigeria’s domestic debt portfolio. In 2005, it commenced a textbook bond market development programme. This began with the initial issuance of 2 and 3 year bonds for which there was appetite, and gradually and predictably increased to issues of 5, 7, 10 and now 20 year bonds. However, the regular monthly issuance of the federal government bonds of increasing tenor generates a sovereign yield curve which serves as a benchmark for pricing other securities, including corporate bonds. This is a very powerful strategy to support growth by generating long term funding sources for government financed development projects such as infrastructure, but more importantly, will help to realize the potential of Nigeria’s vibrant private sector to create wealth and jobs by opening this source of domestic funding.
In December 2004, the Nigerian domestic debt stock had an outstanding amount of N1, 370.32 billion, compared to the N1,329.72 billion as at December 2003. This figure had an increase of N40.63 billion or 3.1 percent over the previous year’s figure. This however, was the lowest annual growth in the domestic debt stock for eight years(DMO 2009).