Eurobond: Re-lending withheld FAAC dollars to FGN?

Written by the Editorial Board of The Guardian Newspaper

The Federal Government has borrowed US$1 billion via a Global Medium Term Note or 15-year Eurobond that became effective on February 14, 2017. It was 780 per cent subscribed at a fixed coupon rate of 7.875 per cent. Issued in the United Kingdom, the Eurobond has been listed for trading on the London Stock Exchange’s regulated market. The bond is also expected to be listed on The Nigeria Stock Exchange for trading on the FMDQ OTC Securities Exchange.

Credit for stoking international interest in the issue has been attributed to the roadshow held abroad that was graced in person by Mrs. Kemi Adeosun, minister of Finance, Senator Udo Udoma, minister of Budget and National Planning, Mr. Godwin Emefiele, CBN governor, Dr. Abraham Nwakwo, director-general, Debt Management Office (DMO) and Mr. Ben Akabueze, director-general, Budget Office. Although the Eurobond bears the tag of $1 billion, the lump sum payment realised by government was much less. The undisclosed difference between the received lump sum and the bond value represents upfront fees and sundry negotiated charges payable in dollars to Nigeria-based financial institutions (albeit with significant foreign interests), namely, the lead co-fund managers of Citigroup Global Markets Ltd and Standard Chartered Bank, both of which have Stanbic IBTC Capital as the financial adviser. So the roadshow which took place abroad won Nigeria-established fund managers whose solid reach to numerous international investors in such bonds should be taken for granted. The roadshow was therefore uncalled-for. Additionally, bearing in mind the undisclosed cost to Nigeria of the roadshow which was in scarce forex, the Federal Government collected under $1 billion in February 2017 and signed away coupon rate and redemption costs of the bond amounting to at least $2,117.5 billion by February 2032 out of its guaranteed multi-billion dollar receipts from oil exports. Clearly, the Eurobond was effectively a risk-free bounty or dash with return that dwarfs LIBOR. No wonder the offer was oversubscribed by some six times. But why is the FG celebrating the handing over of the stranglehold on future public sector receipts to private investors as “a demonstration of the strong market for Nigeria appetite and indicative of the confidence by the international investment community in Nigeria’s economic reform agenda?’’

It should be noted that Eurobond subscribers and secondary bondholders may come from different countries including, strange but true, Nigeria. In both categories of investors will be found, possibly in the majority, Nigerian individuals and institutions which are inundated with forex which they did not directly generate but still find themselves in a position to deploy for subscription readily available forex hoards obtained from the inappropriate but routine CBN auctions of wrongfully withheld Federation Account dollar allocations.
Now, did the FG need the Eurobond? The question is answered in the negative by the high likelihood that the Eurobond was open to what may be aptly termed incestuous subscription (whereby withheld FAAC dollars turn out from a part of the invested funds). It is puzzling that such possibility escaped the organisers or promoters of the Eurobond roadshow at all. In the circumstances, participants in the roadshow, who happen to be the apex fiscal and monetary decision makers, individually and collectively, professionally and politically have not served Nigeria well by embracing the Eurobond and suchlike borrowings as a solution to the so-called forex scarcity (which is artificial as will be seen shortly) facing the country. Being current holders of public offices that have existed since independence (excepting the DMO), the apex decision makers on fiscal and monetary matters are both answerable for and bound by duty to correct any inherited policy mistake whether they arose from acts of commission or omission.

Accordingly, the top fiscal and monetary officials should shed forthwith the toga of being ciphers holding office for the spoils which they wore to the unwarranted Eurobond roadshow, wake up to the respective statutory responsibility that they hold in public trust and correct the mistake made by their predecessors in 1971 upon the demise of the Bretton Woods system of fixed exchange rates. The mistake involves the CBN withholding Federation Account dollar allocations as so-called CBN’s external reserves and simultaneously substituting for budgetary spending by FA beneficiaries freshly printed purported naira equivalent. It is not naira equivalent because that step is economically synonymous with the apex bank proportionately financing the budgets of the tiers of government to the extent of withheld dollar allocations. The economy has reflected the adverse impact of the resultant excessive fiscal deficits since the 1970s.

Tragically, the so-called CBN’s external reserves (which even the FG is precluded from investing) are dissipated through auctioning in the guise of defending the value of the naira in a sham forex market. For the CBN, the naira proceeds from the dollar auctions are junk (money removed from the system for destruction). On the other hand, the auctions guarantee access to physical dollar cash (forming part of the withheld FA dollar allocations) to the even elements that neither export any goods and services nor have legitimate economic use for foreign exchange.

The dollar cash acquired from the apex deposit money banks is put to abuses that are absolutely detrimental to the national economic objectives such as currency speculation, dollarization, smuggling, stashing away in foreign lands and so on. The forex is also hoarded in domiciliary dollar accounts with no time limit which has created unconstitutional dual currency system with the naira playing the second fiddle. The limitless avenues of abuse include locking up hoards of dollar cash in private places thereby sequestering the forex from the working of the economy.

Through the Eurobond, part of the auctioned FA dollar allocations most probably formed the bulk of the subscription or forex funds re-lent to the FG at coupon rates payable in government’s future dollar earnings. The mistake if 1971 has simply finished off the economy. It therefore amounts to shedding crocodile tears for the above named successor top fiscal/monetary officials to lament the self-created forex scarcity and multiple exchange rates. Along with their predecessors, they have nursed the baneful mistake for over 46 years. Is that a mark of rational economic behaviour on the part of the most populous black country on earth? The mistake of 1971 should cease.

This newspaper has demonstrated untiringly that proper management of FA dollars would channel the country’s total public and private sector export earnings productively and provide ample forex for desirable economic activity with the FG investing part of the country’s exclusively FG-OWNED external reserves in various infrastructure and vital projects as the need for them arises.