By July 1, 2010 02:12AM

 

The federal government has continued to borrow from the primary market in a bid to raise funds and also to check inflation. The Debt Management Office (DMO) last week raised a total of N228.36 billion in three, 10 and 20 year bonds.

 

At the three year bond auction, the Central Bank, on behalf of the DMO offered N30 billion, which was 327 per cent subscribed at N98.10 billion and a marginal rate of 6.24 per cent. It also floated longer tenured bonds as the 10 and 20 year bonds of N30 billion and N20 billion were subscribed by 214.03 per cent and 335.1 per cent each raising N64.21 billion and N66.05 billion in that order.

Mopping up credit

The credit mop up continued on Wednesday as the government plans to raise about N132.14 billion in 91-day, 182-day and 364-day treasury bills. The Central Bank plans to issue N31.84 billion in 91-day bills, N50.30 billion in 182-day bills, and N50 billion in 364-day treasury bonds, using the Dutch Auction System. All these are part of effort to control money supply and to enable banks manage their liquidity.

 

Abraham Nwankwo, the DMO director general said at an event last week in Lagos that one of its achievements is the spreading of government debt profile from short tenor instruments to longer tenor which now represent over 60 per cent. Mr. Nwankwo said from November 2008, the DMO demonstrated that Nigeria had what it takes to have 20-year bonds, even against the advice of development partners and international capital market experts.

 

Crowding out private sector

Bright Okogwu, the director general of the Budget Office, said government was mindful of the implication of crowding out the private sector from the credit market. At a seminar on the 2010 budget held in Lagos last week, Mr. Okogwu said credit to government is rising faster than credit to private sector. “Credit to government grew by 28.4 per cent from December 2009 to March 2010 while credit to private sector declined by 1.7 per cent,” he said. Okogwu said there was need for government stimulus to invigorate private sector activity especially in the absence of lending by commercial banks. “Government is mindful of the need to avoid over stretching the domestic bond market,” he said.

 

Appropriate instruments

Wale Abe, executive secretary, Financial Market Dealers Association (FMDA) said the mopping up was in fulfilment of part of CBN roles to ensure monetary stability. “It also injects when it is desirable to do so,” he said. “The Institution has a picture of the volume of money in circulation and it equally has targets for the economic variables. With this advantage it uses whichever tool it believes would be the most effective and efficient to achieve that target. So the use of the instruments is perhaps most appropriate.”

 

Mr. Abe said a monitoring of the liquidity in the system shows a high level of liquidity, adding, “frequent swings create volatility as opposed to relative stability, which the monetary authorities hopes to achieve by its action.” He noted that some of the instruments are short term and are liquid. “Once there are opportunities for lending to viable and profitable sectors, the banks are in a position to manage their balance sheet to achieve that goal.”

 

(Source:NEXT)