In a recently published country report for Nigeria, the International Monetary Fund (IMF) raised red flags about the government’s plan to release domestic dollar-denominated bonds. The IMF cautioned that this decision could worsen the strain on the Naira and increase the expenses tied to naira securities. The report highlighted the federal government’s intention to update its Medium-Term Debt Strategy, created with input from the IMF and World Bank Capacity Development (CD). The goal of the update is to enhance the sale of medium-term securities and Eurobonds, while also optimizing support from both multilateral and bilateral sources.
According to the report, interest expenses are expected to increase due to Monetary Policy becoming tighter and higher external financing expenses. In response, government officials are revising their Medium-Term Debt Strategy in collaboration with the IMF/WB CD, aiming to boost the issuance of medium-term securities and Eurobonds, and make the most of support from international organizations and other countries. The issuance of domestic FX securities by the government aims to boost dollar liquidity in the local market. However, this could potentially cause fragmentation in the market, raising the cost of naira securities, and further straining the naira’s stability.
CBN recommended to creates a framework for FXI.
Furthermore, the IMF warned against the federal government’s proposal to launch domestic foreign exchange securities, which aim to boost dollar availability in the official market but could potentially divide the market. It suggested that the Central Bank of Nigeria (CBN) formulate a foreign exchange intervention strategy to curb excessive fluctuations in the naira, as Nigeria’s foreign exchange market is not very robust. According to the report, issuing FX denominated government securities domestically could potentially cause market fragmentation and undermine the effectiveness of the transmission mechanism.
To address the fluctuations of the naira caused by the limited FX market, it is recommended that the CBN creates a framework for FXI. The Minister of Finance, Wale Edun, recently disclosed the government’s intention to launch domestic Bonds in foreign currency during the second quarter of the year. This initiative aims to attract both local and diaspora Investors to participate in purchasing foreign exchange bonds. The reason behind the delay in releasing the bonds, as explained by Edun, was the government’s focus on building trust in its fiscal approach and gaining the confidence of skeptical citizens towards government policies.
Exchange rate has since plummeted by a substantial 26.8%
Should the government decide to move forward with issuing local currency bonds in Q2 this year, it could coincide with a period of weakness for the naira against the US dollar. The exchange rate between the two currencies ended the week at ₦1,466/$1, hitting a two-month low due to the US dollar’s strength compared to other global currencies. After being declared the top-performing currency by the apex bank in April, the exchange rate has since plummeted by a substantial 26.8% from its peak of ₦1,072/$1.
The naira has hit its lowest point since March 20th with a closing rate of ₦1,466/$1, wiping out all gains made in April. In a positive turn of events, the exchange rate reached a yearly high of ₦1,072/$1 on April 17th, giving Nigerians hope that the central bank’s forex strategies were working. During the IMF press briefing, the Central Bank governor announced that there were no plans to support the naira after a decrease in external reserves, causing a peak in market activity.
Related Article: High rates deter Nigeria, others from bonds
After a month-long decrease, Nigeria’s foreign exchange reserves hit a low of $32.12 billion on April 17, 2024. However, there has been a recent increase in reserves as the value of the naira has started to climb after weeks of decline. According to new information from CBN, a significant amount of $1.12 billion out of the total outflows of $1.61 billion during this period was allocated to settling External Debt instead of supporting the naira. This highlights the increasing pressure that foreign debt is exerting on the National Budget and the domestic currency market.