The International Monetary Fund has raised concern about the Nigerian government’s policy of issuing domestic dollar-denominated bonds, according to the recently published IMF staff country report for Nigeria.
The Fund is concerned that such a move could aggravate the pressure on the naira and increase the cost of naira securities, according to Nairametrics.
The report noted the federal government’s plan to revise its Medium-term Debt Strategy, developed in collaboration with the IMF and World Bank Capacity Development, aims to bolster the issuance of medium-term and bilateral support.
The report reads “With monetary tightening and elevated external financing costs, interest expenditures will go up. The authorities are updating their Medium-Term Debt Strategy with IMF/WB CD, seeking to increase the issuance of medium-term securities and Eurobonds, while maximizing multilateral and bilateral support.
“The government plans to issue domestic FX securities to bring onshore dollar liquidity to the official market, which could lead to market fragmentation, increase the cost of naira securities, and add to pressures on the naira.”
The IMF also noted that market fragmentation could occur if the federal government proceeded with plans to issue domestic foreign exchange securities to improve dollar liquidity on the official market.
The IMF advised the Central Bank of Nigeria to develop a foreign exchange intervention framework to mitigate excessive volatility in the naira, given the limited depth of Nigeria’s foreign exchange market.
The International Monetary Fund recommended that Nigeria’s central bank establish a foreign exchange intervention framework to reduce high volatility in the naira.
The report stated “Domestic issuance of FX denominated government securities is likely to lead to market fragmentation and weaken the transmission mechanism. The CBN should develop an FXI framework to smooth excess naira volatility, given the shallow nature of the FX market.”
Recall the Minister of Finance, Wale Edun announced the governments’ plan to market foreign exchange bonds to Nigerians both at home and in the diaspora
