Nigeria bond issuance may drop on single treasury account directive

Nwankwo, Nigeria's debt office boss

The directive of Nigerian President Muhammadu Buhari to compel government Ministries, Departments and Agencies to maintain the Single Treasury Account (TSA) at the Central Bank, could whittle down the appetite for the issuance of FGN Sovereign bonds, according to bankers and economists.
“On the one hand, there is little question that a TSA will help to reduce the overall level of government borrowing over time. If all government agencies pool their revenue into a single account, not only is there more transparency, but this should also reduce the amount that needs to be borrowed, because of the balances available to government agencies,” Razia Khan, Managing Director, Chief Economist, Africa Global Research at Standard Chartered Bank, London, said in a response to questions.
“Near term however, lower oil prices and the discovery of substantial arrears will push Nigeria’s borrowing requirement higher.”
Nigeria, Africa’s largest crude producer, relies on oil revenues to fund about 70 percent of the Federal Budget and 95 percent of exports income.
As the price of oil plunged 50 percent in the past 12 months, the government has had to run a large deficit this year, with revenues getting squeezed.
Nigeria’s 2015 budget that proposes to spend N4.358 trillion on recurrent and capital projects has an embedded deficit of N755 billion which will be 75 percent financed by domestic borrowing.
Some estimates put out by the All Progressives Congress (APC) political party, following the election suggest that blocking the leakages in government could save a staggering N3 trillion a year, but a leading economist and University Professor was more conservative with his own estimates which he put at 20 percent of government revenues that can accrue from the TSA move alone.
There is also the potential of a doubling of the Value Added Tax (VAT) rate from five to ten percent, which by itself is capable of lifting Federal revenues by as much as N250 billion a year.
Analysts believe that if the two policy measures are fully implemented, there will be a significant reduction in the annual budget deficit of the Federal Government, thereby cutting the amount of bonds issued annually in a nation where gross non – oil revenues amount to a paltry 3.8 percent of GDP, according to 2014 figures.
“The TSA is similar to what is now normal practise in Kenya, and that has probably been helpful in keeping borrowing costs down,” said Charles Robertson, Renaissance Capital’s global chief economist, in a response to questions.
“Pre-TSA, a government may need funds for some expenditure, and without immediate knowledge of which accounts have X funds, they may end up using debt to finance that expenditure, when it wasn’t necessary to do so.”
However the TSA regime could also result in lowering liquidity in the banking system, while any cut in bond issuance will mean a further reduction in the range and scope of risk free income for Nigerian banks.
It also means that senior civil servants in the ranks of deputy directors, directors and their permanent secretaries will lose a veritable source of illicit funds made from secretly placing funds in fixed deposits with banks.
Khan notes however that Nigeria has yet to unveil updated fiscal deficit projections, even as a larger borrowing requirement, given that oil earnings undershooting 2015 budget assumptions, is very likely.
“A TSA will still help, but it won’t come close to offsetting the increase in the borrowing requirement. Unless recurrent spending can be cut a lot more, which is doubtful, the borrowing requirement looks likely to increase.’’
CULLED FROM BUSINESSDAY