Inflation-linked instruments as basis for growth

 The director general of Debt Management Office, Abraham Nwankwo, said recently that the long-awaited inflation-indexed bonds will finally be issued this year to meet some portion of the N577 billion domestic borrowing to finance the budget deficit.

Inflation-indexed bonds, also known as inflation-linked bonds, are bonds where the principal is indexed to inflation. They are thus designed to cut out the inflation risk of an investment with the aim of protecting the savings of the poor and middle class from inflation and incentivise the household sector to save in the long-tenured financial instruments rather than invest in short term which does not aid economic growth.

Besides, the instruments are expected to address the concern of investors about the impact of inflation on the domestic debt market.

“The inflation-linked bond is part of our 2013 to 2017 strategic plan,” Nwankwo said. Also being considered alongside the inflation-linked bond before the end of the year, according to DMO boss, in a renewed effort at strengthening the bond market, are securities lending and bond switches. This, he said, is to “further strengthen and deepen the FGN bond market for enhanced liquidity through the continued issuance of benchmark bonds and introduction of other varieties of debt instruments such as securities lending, bond switches and inflation-linked bonds into the domestic bond market”.

This is cheering news considering that inflation has not been steady in recent times. Besides, the introduction of the bonds will provide wider investment opportunities and also the possibility of trading in the National Pension Commission (PenCom) funds, which have for long not been put to proper investment due to what the Commission regards as lack of investment instruments.

The DMO should also be commended for its determination to sustain the strategic plan, the use of the analytical debt management tools, and ensuring that public debt management remains a vehicle for macroeconomic stability and poverty reduction.

“Going forward, the DMO will strengthen the country’s presence at ICM through the issuance of $1.00 billion Eurobond, N80 billion FGN bonds in the form of Global Depository Notes (GDN) and $100 million Nigerian Diaspora Bond,” Nwankwo said.

Indeed, in the 2012-2015 medium-term strategy plan recently approved by the Federal Executive Council (FEC), the DMO changed the ratio from 87/13 to the new mix of 60/40, thereby reducing the percentage of domestic borrowing in favour of foreign debt.

Analysts have said that rising burden of domestic debt service in recent years compared to external borrowing may have put the new debt strategy in a better stead and hence provides opportunity to private sector to borrow for the needs of the economy. Nigeria’s current domestic debt stands at N6.5 trillion and external debt at $6.7 billion.