AlwaysFree: Nigeria Bonds Jump On Plan To End Revenue-Depleting Gas Benefit

• Finance ministry makes statement after earlier signaling delay
• Government plans wider consultation to draw up a road map

According to Bloomberg article published on April 28, 2023, Nigeria’s international bonds surged after the finance ministry said it would scrap a fuel subsidy that consumes almost all of the nation’s earnings from oil, its main source of revenue.

Dollar bonds due in 2047 jumped 2.5 cents to 62.94 in their largest increase since January. As of 2 p.m. in London on Friday, Nigerian bonds of varying maturities made up all 10 of the biggest winners in emerging markets on the day.  

The West African nation will go ahead with plans to cease its subsidy arrangement after further consultations with the incoming administration of President-elect Bola Tinubu and state governors, the finance ministry said in a statement on Friday. That cleared up confusion from Thursday, when bonds plunged after Finance Minister Zainab Ahmed indicated that removing the subsidies could be delayed past an earlier deadline of June 1. 

Unsustainable Expense

The government is establishing a committee that will include members of the president-elect’s team to draw up the road map for the removal of the subsidy, the finance ministry said. The benefit must be removed because it’s not sustainable, Ahmed was cited as saying in the Friday statement. 

Energy subsidies would cost Nigeria an estimated $13 billion this year if they were sustained. That would worsen the already-dire fiscal situation of Africa’s biggest economy, where debt service costs consumed 96% of government revenues last year. 

Tinubu, a former governor of Lagos state, said in his campaign manifesto that he’ll remove the subsidy and allow the market to set prices at the pump. The savings could be allocated to health, education, infrastructure and social welfare projects, he said. He’s expected to be sworn on May 29. 

Removal of the subsidy is unpopular and will raise the cost of living for Nigerians already dealing with high inflation, which quickened to an almost 18-year high of 22% in March. 

Nigeria has been locked out of the international debt markets since yields on its dollar notes rose to distressed levels. The yield on its 2051 eurobond, its longest-maturity note, was 12.9% on Friday, down from a high of 15.8% in October.

It’s been more than a year since any country in Sub-Saharan Africa has issued an international bond. Nigeria’s last sale was a $1.25 billion offering in March 2022.

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