• Monday, April 22, 2024
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Thoughts on CBN’s new rule on state bonds


Kaye Whiteman

All the states in Nigeria need massive inflow of well-channelled resources to attain minimum desirable levels of development. However, few of the leaders of virtually all the states in the country possess the character and attitudes required to touch any publicly-owned fund not to talk of that of investors.

Investments are made because of the expectations of some returns on them. Returns on investments in-turn do not occur when invested funds are not entrepreneurially deployed to yield those returns. One window which has traditionally remained open for state governments to meet their state’s developmental aspirations is the bond market. Unfortunately, only 25% of state governments have been able to tap into this opportunity window in the past decade. The primary reason for this, is the apparent financial opaqueness of the governments which invariably makes it difficult to produce tidy and credible financial statements as required by law. There are nevertheless other challenges, such as high capital-raising costs, and the poor repayment capacity. The latter however should not constitute much of a challenge if the man at the helm of the state is both patriotic and entrepreneurially minded. That is where the recent rules set by the CBN on granting liquid asset status to state bonds is very commendable.

But come to think of it, if the above-stated are the main reasons for poor access of state governments to the bond market, to what extent will the CBN’s conferment of liquidity status on state government bonds help matters? The answer will depend on the side of the divide under consideration. One thing is however clear, the new rule will help a great deal particularly in instilling more confidence on the side of fund suppliers as should be expected. But whether the added confidence and expectations of enhanced willingness to invest in state bond will encourage state governments to go for bonds will increasingly depend on the type of the governor. Typical cash-and-carry Nigerian governors will hardly ever meet the strict conditions required to successfully access the market for bonds. Prior to the new rule, investments in state bonds are substantially protected by the CBN and the Securities and Exchange Commission (SEC) yet not much of these opportunities are tapped. In some instances, even the promise of 100% underwriting of the capital raising exercise never changes the resistance of some governments.

A good example is a state government which invited experts to assist with initiatives for its private sector development. The terms of reference for the experts required that the sources of the state’s less than desirable economic performance be identified alongside the environmental conditions and projects that would trigger rapid growth. To cap it all, the assembled wise men were also expected to source for the funds that would enable the implementation of all the solutions that are possible. To shorten the story, the triggers for the expected renewed growth were identified. The funding sources were equally not only identified but fully contracted at an in-principle level with a pledge of 100% underwriting commitment for the sum required to get all projects on stream. But at the time when it appeared that action was to commence the readiness of the state government to use what is being handed over to them on a platter of gold started wobbling. The willingness to proceed with the bond lies on the altar of politicking! It is a common story among many state governments: a disappointing position that is usually pitched on politics and baseless speculations.

However, for states such as Lagos state that has incredibly demonstrated the power of leveraging available funding sources to strengthen the capacity of the state for more revenue generation, CBN’s new move will make it the more possible for them to access more funds. Aside protecting the funds of the investors by strengthening the creation of a secondary market window the new rule will further deepen the market and accelerate the near immobile bond market towards the standards of bond markets in developed countries. The beauty of the additional rule is that it complements the pre-existing controls which are meant to be applied altogether in evaluating any state application.

Let us review the elements of these confidence boosters. The first is the state government’s credit rating which is conducted on the basis of such fundamental criteria as credit history, credit worthiness and debt repayment capacity. Given the recent experiences of banks who in spite of their strong credit ratings were later discovered to be white-wash tombs and candidates for failure, credit ratings will increasingly be taken with a pinch of salt or at best discounted appropriately by those who possess the competence for that.

This gets even the more imperative in the case of state governments. It is very much so because the government space is very much decorated with corruption and as such some state governments can easily either deceive the rating agency by supplying spurious information to them or out rightly bribing their way to get favourably rated. On the main however, we believe that the rating agencies are very professionally minded and will not succumb to such unacceptable behaviour. If that is the case, then a state government bond with a higher credit rating assures investors of getting both their capital and returns from the acquisition of their issued bonds.

The guidelines also help in curbing the identified public sector corruption only to the extent that the government is genuinely desirous of enthroning true development in the state. Executed properly, the guidelines will pressure state government leaders to act more transparently. This may however not be at the level of the state houses of assembly as many of such legislative houses are actually inside the pockets of their respective governors. To a large extent they merely represent an assembly of persons that rubber stamp or legitimize the intentions and actions of the state governor who in the first instance facilitated their becoming state legislators.

The truth is that many states do not have independent legislature who are authentically free to take own decisions. In states where this is not the case, it enhances more active deliberations on the relevance, need and return / development prospects of the projects for which the states are accessing the bond market and will be in debt for several years to come.