Nigeria’s relative macro-economic stability of the past decade has been aided by the groundwork of reforms embarked upon by two-term finance minister, Ngozi Okonjo – Iweala and Central Bank of Nigeria (CBN) governor, Sanusi Lamido Sanusi.
In 1995, Nigeria’s inflation rate was a vertigo inducing 75 percent, while the naira which was at virtual parity with the dollar in the early eighties had tumbled to N21/ $1 by 1999, a more than 400 percent devaluation, according to a BusinessDay analysis of available CBN data.
This was of course in the official market, which met less than a tenth of dollar demand; in the parallel markets where the naira exchanged for N88/$1(in 1999) the rate of naira devaluation was much higher, at over 640 percent, between 1980 and 1999.
“Macro stability in the past decade has resulted fundamentally from the fiscal reforms put in place by Okonjo-Iweala in her first term (in particular, capping the deficit at 3 percent of GDP), and more recently, from the tighter monetary policy regime put in place by the
CBN,” said Razia Khan, regional Head of Research, Africa, at Standard Chartered Bank, in an email response to questions.
In the 20-year period (1980 – 1999) the CPI averaged 25.8 percent. This compares with the 2000 to 2010 period, when inflation averaged 11.9 percent, while the naira has moved from N110/$1 in 2000 – to N157/$1 in 2012, a 42 percent devaluation in ten years, and a testament to the relative macro-economic stability in the latter period.
The reforms have aided the development of the domestic bond market as well.
Moribund until 2003, the domestic bond market today finances much of the FG budget deficit, and some long term infrastructure projects.
This has eliminated the so called ‘ways and means’ (money printing) deficit financing, rampant in the eighties and nineties, and a major source of inflation.
Nigeria’s bond market development has benefited from the lifting of the 1 Year holding period restriction on FGN bonds by Sanusi last year, and a hike in interest rates, leading to attractive yields, and ultimately, the addition of Nigerian Bonds to JPMorgan’s GBI-EM and the Barclays EMLC index.
“It is very unlikely that foreigners would be showing the interest they currently show in Nigeria’s bond market, in the absence of reassurance on these reforms,” said Khan.
The size of the domestic bond market in 2011 was N9.5 trillion ($60 billion), made up of AMCON bonds (57.42 percent), FGN bonds (37.21 percent), Sub nationals (3.58 percent) and Corporate bonds (1.79 percent).
The value of transactions in the domestic fixed income market is up four folds since 2006, reaching a value of N14.7 trillion at the end of 2010, from an almost negligible level in 2000 according to data from investment firm, Vetiva Capital.
“The launch of the Primary Dealers Market Makers platform in 2006 ensured some broadly consistent trading activity in on-the-run bonds, and two-way quotes over-the-counter,” said Samir Gadio, an emerging markets strategist at Standard Bank.
Meanwhile, the nation’s yield curve has extended from 3 months to 20 years, with 3year, 5 year, 10 year and 20 year bonds, routinely issued by the Debt Management Office (DMO).
According to Khan, the important building blocks needed before this could become possible, were put in place by Okonjo-Iweala and Sanusi.
“As a result of the increased flow from offshore investors, the Naira is stable. This has helped too, with macro-economic stability, and acts as a check on policies that should continue to guarantee stability”, he said.
Nigeria last week got an upgrade and new coverage of its sovereign debt, as Standard and Poor’s (S&P) upped it to BB- and Moody’s initiated coverage at the equivalent level, due to progress on reforms.