FGN’s N2.7trn Promissory Notes to Its Creditors - Impact on Liquidity and Interest Rates


Wednesday, April 11, 2018 /09:45AM /FDC 

The Federal Government on July, 2017 approved to issue N2.7trn of promissory notes to offset its debt to local contractors. This payment will cover obligations dated as far back as 1994 and will be phased over a three-year period. The debt instrument is 11.25% of money supply and 12.43% of Nigeria’s total debt stock as at December 31st, 2017. Once these instruments are issued, the impact on liquidity and other macro-economic variables such as interest rates and the exchange rate will be profound.

Impact on Economic Variables

Money Supply & Inflation
Growth in money supply has been benign at an annualized rate of 0.42% (CBN’s benchmark is 10.29%). This is expected to change once the promissory notes are discounted. Assuming at least 50% of the notes are discounted, this will be equivalent to at least two months of FAAC. The liquidity pressure will be significant and could exacerbate inflationary pressures through the demand pull effect. Inflation has been on a downward trend in the last 13 months to 14.33% (February inflation data). Whilst we are anticipating a further deceleration in March, once these notes are issued and discounted, we may see a reversal in trend. Also, there are questions to the authenticity of some of the debts, which may actually be political IOUs especially as the campaign season has started. Hence the payment of such political debts will result in increased money supply with no impact on productivity.

Nominal Interest Rates
The negative relationship between increased liquidity and nominal interest rates means that aver-age NIBOR, which has ranged between 12% pa-14% pa is expected to trend downwards.

Exchange Rates
Also, exchange rate gains recorded in the forex market will come under pressure as the demand for Forex by contractors/ manufacturers, to bring in new inventory, builds up.

Impact on Monetary Policy
The anticipated inflationary and likely exchange rate pressure may delay the start of an accommodative monetary policy or even trigger a further increase in rates by the hawks among the MPC.

The good news is that these funds can be channeled into productive activities which will boost aggregate output. This increase economic activity will taper the inflationary pressures that in-creased money supply will trigger.

Proshare Nigeria Pvt. Ltd.

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