FG set to raise N105bn to finance budget deficit through sovereign bonds




The Federal Government has concluded plans to raise N105 billion, about $700 million on July 21, its seventh debt auction this year to finance gaps in the 2010 budget.


The Debt Management Office (DMO) said it would sell N35 billion each in the 3-year, 5-year and 20-year sovereign bonds. The 20-year paper is a new issue, while the two other re-open previous issues, the DMO said in a statement. Wale Abe, chief executive officer of the Financial Market Dealers Association of Nigeria (FMDA), told BusinessDay that it is normal practice for the government to raise or borrow funds to finance specific projects.


He said it is not unusual for the government that has substantial deficit in the 2010 budget to resort to raising funds through the DMO to finance key projects in the country.Based on the need of the government, the DMO sells bonds that are government backed or securitized to be able to attract investors, particularly foreign investors. Government bonds are usually referred to as risk-free bonds, because the government can raise taxes to redeem the bond at maturity.


The debt office said “successful bidders (for the 3- and 5-year bonds) will pay a price corresponding to the yield-to-maturity bid that clears the volume being auctioned, plus accrued interest from the original issue date,”. The yield for the 20-year paper, the longest-tenor debt instrument in Nigeria, will be determined at the auction. During the break fast meeting at the Lagos Business School organized by the Financial Derivatives Company (FDC), experts had expressed fears that there will be huge gap between Federal Government revenue and its planned expenditure in the budget 2010 following perceived risk of leakages.


Bismarck Rewane, chief executive of FDC, had said during the break fast meeting last week that matters are not helped as the N639.8 billion expected to be signed into law under supplementary budget has a mere 21 percent as provision for capital expenditure while 79 percent will go for recurrent expenditure. Even Olusegun Aganga, minister of finance, had also expressed fears over budget 2010 funding as it concerns expected gap between revenue and planned expenditure for the year.


Based on the fact that the rise in international crude oil prices might not be sustained, President Goodluck Jonathan had asked the National Assembly to cut the budget by 26 percent or N1.2 trillion. Earlier, Remi Babalola, minister of state for finance had said this year’s expansionary spending is “unsustainable” and will drain the OPEC member’s windfall oil savings if not controlled.


Experts say the N4.6 trillion budget risks saddling the economy with a budget deficit of more than five percent.





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