The Federal Government’s total debt stock may experience a significant increase from N87.3tn (as of December 2023) to N111.4tn, following fresh borrowings in the first quarter of 2024.
According to an analysis by The According, the Federal Government borrowed over N7tn via fixed income instruments as well as the first tranche of $2.25bn from a $3.3bn Afreximbank loan in the first quarter of the year.
The local borrowings comprised funds raised via Treasury Bills, FGN Bonds and Savings Bonds as the Federal Government tapped domestic borrowing sources following a topsy-turvy exchange rate crisis that bedevilled the economy in the early exchanges of the year.
Last month, in its updated ‘Total Public Debt Portfolio,’ the Debt Management Office said Nigeria’s total debt had increased to N97.3tn.
This figure, however, included local and external debts owed by all 36 states and the Federal Capital Territory.
According to the data, the Federal Government’s total debt stock stood at N87.3tn. That is, N53.2tn in local debt and N34tn in foreign debt. The sub-national government’s debt was about N10tn.
The DMO said the Central Bank of Nigeria’s official exchange rate of US$1 to N899.393 as at December 31, 2023 was used in converting external debt to naira.
However, in the first quarter of the year, the Federal Government, furtherance to its objective of shoring up the N9.18tn deficit in its 2024 budget, tapped local sources and borrowed over N7tn via the fixed income market.
In January 2024, the Federal Government raised about N418.197bn from the four bonds that were auctioned.
In February, it realised N1.49tn from the two FGN bond offer issued by the DMO below the target of N2.5tn.
The DMO, again floated a N450bn from its third FGN bond auction of 2024. The bond auction date was March 18, 2024, with a settlement date of March 20, 2024.
Also, in February, the DMO issued N2.43bn worth of Savings bonds at 12.751 per cent and 13.751 per cent for the 2-year and 3-year bonds respectively.
In March, it also raised about N2.9bn worth of Savings Bonds at a rate of 15.097 per cent and 16.097 per cent for the 2-year and 3-year bonds respectively.
During the period in review, the Federal Government raised the bulk of its debt via Treasury Bills. The total subscription for the quarter stood at N21.17tn as higher interest rates attracted investors. However, the CBN’s total sales amounted to about N5.64tn.
The most recent auction on March 27, 2024, witnessed a total subscription of over N2.62tn across the 91, 182, and 364-day tenors. The total sales for this auction amounted to over N1.19tn.
On the foreign scene, Nigeria, in January successfully arranged a syndicated US$3.3bn crude oil prepayment facility from the African Export-Import Bank. The loan was sponsored by the Nigerian National Petroleum Company Limited.
An initial disbursement of US$2.25bn has been made. A second tranche of US$1.05bn is expected to be disbursed next month.
The five-year facility carries a margin of 6.0 per cent per annum above the 3-month secured overnight financing rate.
The transaction structure has an embedded price balance mechanism where 90 per cent of all excess cash from the sale of the committed barrels (after debt service) will be released while the balance of 10 per cent will be used to prepay the facility, effectively shortening the final maturity of the facility and freeing cashflow from future pledged cargoes for use by Nigeria.
The initial participating lenders are Afreximbank, Africa’s multilateral trade finance institution, Gunvor International BV, a Geneva-based multinational energy and commodities trading company and Sahara Energy Resources Limited, an African-owned, leading international energy and infrastructure conglomerate.
Based on the new borrowings recorded in the first quarter of the year and the effect of naira depreciation on external debt, the Federal Government’s total debt may witness a significant jump to N111.4tn.
This indicates a 27.6 per cent increase from the N87tn recorded by the end of 2023. With plans to leverage more domestic and external borrowing sources already in the pipeline, the figure is likely to record a considerable increase by the end of the second quarter of the year.
While speaking with Bloomberg in January, the Minister of Finance and Coordinating Minister of the economy, Wale Edun, had said that Nigeria was exploring the possibility of obtaining a $1.5bn loan from the World Bank this year.
“We’re hoping to get $1bn or $1.5bn from the World Bank for budgetary support,” Edun told Bloomberg.
Last month, the Federal Government enlisted the expertise of leading global investment banks, including Citibank NA, JPMorgan Chase & Co, and Goldman Sachs Group Inc., to guide its forthcoming Eurobond issuance.
It also appointed Standard Chartered Bank and the Lagos-based financial advisory firm Chapel Hill Denham to consult on this venture.
The Eurobond issue which would be the first since 2022, marks the country’s return to the international bond market after a two-year pause. In March 2022, the country raised $1.25 billion through Eurobond issuances.
This development, as reported by Bloomberg and informed by sources close to the transaction, underscores the intent of Africa’s leading oil-producing nation to re-engage with global financial markets in order to bolster its fiscal budget
On the local scene, the Federal Government has already opened offers for the April 2024 Savings Bond, with rates reaching as high as 18.046 per cent per annum.
According to the announcement made by the DMO, the 2-year FGN Savings Bond will be issued at 17.046 per cent per annum, while the 3-year FGN Savings Bond will be issued at 18.046 per cent per annum.
The CBN also plans to sell Treasury Bills worth N1.64tn for the second quarter of 2024 on behalf of the Federal Government.
During the period, the apex bank will issue TBs worth N414.29bn on 91 days tenor, N43.74 billion on 182 days and N1.18tn on 364 days.
The Federal Government’s recourse to tap more domestic borrowing sources comes amid frantic efforts by the CBN to tame the rising inflation by mopping up excess liquidity.
It is important to note that debt financing of Government deficit has been mainly from domestic sources since 2022 due to restricted market access for countries like Nigeria with below investment grade credits.
This arose from global inflation and contractionary monetary policy actions of central banks of advanced economies that triggered reversal of capital flows from emerging markets.
The development prompted the DMO to frame its Medium-Term Debt Management Strategy to recommend more borrowing from domestic sources using long-term instruments relative to external sources.
The MTDS targets 70:30 domestic and external debt composition, and 75:25 ratio for long and short-term debts with respective to domestic debt instruments.
With local debt up to N60.8tn (including borrowings in 2024), Nigeria’s local-external debt ratio now hovers within the vicinity of a 55:45, which falls short of the DMO’s target of 70:30.
Last year, the World Bank had revealed that Nigeria used 96.3 per cent of revenue generated in 2022 to service debt, saying that the constant fiscal deficit has aggravated the nation’s public debt stock.
According to the new International Debt Report, which showed that poorest countries face the risk of debt crises as borrowing costs surge, the increase in costs shifted scarce resources away from critical needs such as health, education and the environment.
The International Monetary Fund, last October, predicted that Nigeria would face a higher percentage of debt to gross domestic product burden.
The report revealed that debt-service payments, which include principal and interest, increased by 5 per cent over the previous year for all developing countries.
The global lender, in a report indicated that Nigeria’s government debt would rise by 4.3 per cent of its GDP in 2024 from 38.8 per cent in 2023.
While speaking with The According, an economic expert at the Lagos Business School, Professor Bongo Adi, said that while the optics of Nigeria’s debt profile paints a bleak picture, the government is currently short of the tools needed to revive the economy and has no choice but to explore opportunities in the debt market.
He also noted that borrowing via fixed income instruments provide the platform for the government to mop up dormant liquidity while also taming the country’s stubborn inflationary pressures.
Adi warned that if the government is not responsible in the way it spends the borrowed funds, the already dire economic adversity in the country would be exacerbated.
He further pointed out that Nigeria’s poor debt-to-revenue ratio may imply that almost all of the country’s revenue in the near future would go into debt servicing, a position already articulated by the World Bank and the International Monetary Fund.
Adi said, “We are already in a very difficult situation with high inflation and high level of unemployment, and the government is still borrowing money. But again, the government is trying to activate the economy, part of the way to do that is by looking for capital injection
“The good thing is that the borrowings are not foreign currency denominated. So the government can borrow against future tax revenue. What we need to look at is what they are doing with the fresh borrowing.
“When you look at taxation. When you encounter organised businesses, what you hear is that they are over-taxed. Individuals, private citizens are also overtaxed, but the challenge is that the taxes that they are paying does not make it to the government coffers. There is so much leakage in the public.
“The government needs to address the revenue gap. I agree with the concern of the IMF that if we do not do much, then we will be trapped and the debt will become a burden, and we will be in a position where we are using all our revenue to service debts and it won’t still be enough.”
On his part, the Director of Research and Strategy at Chapel Hill Denham, Tajudeen Ibrahim said that if the government continues borrowing at the current pace in the coming months, there will be ‘cause for worry.’
He said, “The borrowings that we saw in the first quarter are reflective of historic trend where the government accelerates borrowing in the early part of the year. Our projection at Chapel Hill Denham is that from Q2, borrowing will slow down largely because it has been fast-tracked in the first few months of the year.
“The reality is that the borrowings in the first quarter are elevated and if that momentum is sustained, then there will be cause for worry in the coming quarters.”
