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Nigeria has distributed $4.7 billion in revenues and windfall oil savings to government for July, a massive disbursal which is likely to trigger a drop in bond yields and interbank rates next week, dealers said.

Africa’s biggest oil and gas producer shares its revenues among three tiers of government each month — federal, state and local — and tops the disbursal up with a withdrawal from its windfall oil savings if there is a shortfall.

Accountant General Ibrahim Dankwambo said Nigeria had distributed 404.27 billion naira in revenues and $2 billion from its crude oil savings for last month, making up one of the largest monthly disbursals ever.

Around 80 percent of the liquidity in sub-Saharan Africa’s second-biggest economy comes from public cash flows and the monthly allocations can trigger significant shifts in bond yields and interbank rates.

“We expect (interbank) rates to crash immediately part of monthly budgetary allocations to state and local governments hit the system, latest by Tuesday,” one money market dealer said.

The disbursal comes five months before presidential and parliamentary elections in Africa’s most populous nation. Government spending has traditionally risen in election years, leading analysts to question the quality of the expenditure.

Among the major recipients of the monthly revenue distributions are the country’s 36 states, whose governors form a powerful caucus within the ruling People’s Democratic Party (PDP) and who will be key to the outcome of the polls.

President Goodluck Jonathan, who is from the southern Niger Delta, has not yet announced whether he plans to contest but a bid would be controversial because a “zoning agreement” within the PDP dictates that power should rotate between the Christian south and Muslim north every two terms.

Jonathan inherited the presidency when northern President Umaru Yar’Adua died part way through his first term earlier this year, meaning the next term should go to a northerner.

The PDP said on Friday its national executive council had “unanimously endorsed the retention of the zoning principle” but also said Jonathan had the right to contest because he was on a joint ticket with Yar’Adua, effectively hedging its bets.

“FINANCIAL INDIGESTION”

Government spending is set to rise sharply this year.

Parliament last month approved 445 billion naira in extra spending on top of the main 4.4 trillion naira 2010 budget, likely to push Nigeria’s fiscal deficit beyond 5.4 percent of GDP, above a 3 pct target set three years ago.

“It raises eyebrows,” Bismarck Rewane, head of Lagos-based consultancy Financial Derivatives, said of the latest disbursal.

“Do we have the capacity to absorb this amount of spending in such a short period, what are the inflationary aspects of this? Apart from the propensity of government to waste, there is also the question of financial indigestion,” he said.

Cabinet this week approved the $150 million purchase of three new presidential jets and parliament passed an 88 billion naira budget for the electoral commission to overhaul voter lists, funds to be raised through a government debt issue.

Dankwambo said a further $1 billion had been withdrawn from the excess crude account, a pillar of IMF-backed reforms into which Nigeria saves oil revenues above a benchmark price, to be set aside for the creation of a sovereign wealth fund.

The withdrawal leaves just $460 million in the excess crude account, compared to around $20 billion in early 2007, the start of the current presidential term.

Finance Minister Olusegun Aganga, a former Goldman Sachs executive appointed in March, has said he wants a sovereign wealth fund to replace the excess crude account, which has no clear constitutional basis.

But the fund has not yet been created and it was unclear where the $1 billion would be held in the interim.

REUTERS