In confirmation of the provisions of the Medium-Term Economic Framework (MTEF) recently passed by the National Assembly, the Minister of Finance, on Monday, August 29, 2022, reeled out the Buhari administration’s plan to finance the projected 2023 budget deficit of N9.3 trillion, mainly through domestic borrowing.
It resonated concerns from many economists and analysts who fear the country is racing towards a debt cliff that may envelop its economic fundamentals and trigger a social crisis.
While concerns on the domestic debts are moderated by the understanding that the government holds the fiat to print more naira, the economic consequences of such fiscal measures can be grave. Interestingly, foreign investors have been neutral on Nigeria’s debt market, which has become mainly a local play, as foreigners seek opportunities in Eurobonds and other African local currency bonds which are trading at more attractive levels that compensate for the foreign exchange risk. With the rising threat to Nigeria’s official foreign currency earnings, it is increasingly suicidal to accumulate foreign debt, especially at current interest rate levels. Thus, locally and on the international scene, Nigeria’s legroom in the debt market is getting shortened.
With the country already at the point where interest payment on existing debts is beginning to interfere with the operations of the economy, the borrowing plan is sure to compound a situation that is already bad by all known standards.
Ahmed said new borrowing next year will amount to N9.32trn, made up of N7.4trn from domestic sources, and N1.8trn from foreign sources. She added that the government expects to generate N206.1 billion from privatisation proceeds and another N1.7trn in multilateral project-tied loans.
These figures are virtually out of sync with Nigeria’s current reality as far as the financial markets are concerned.
It is very unlikely that the local bond/TBill market can supply N7.4trn in debt financing to the government come next year. At best, this market could manage to cough out N4trn, while the rest is likely to come from the Ways and Means window.
If the local market cannot absorb this quantum of borrowing, the government will most likely fall back on its Ways and Means, the euphemism for printing money or borrowing from the central bank. With this figure currently standing at about N19trn, the probability is high that it could head toward somewhere close to N30trn next year.
Not many people will share the minister’s optimism on the government not failing in its debt obligations as she said: “We planned that 60 per cent of revenue would be spent on debt servicing, but in some months, the ratio went up to 90 per cent”.
“We have been able to, consistently without fail, service our debt, and we do not have any projections even in the near future that we will fail.”
“We actually follow the Medium-Term Debt Management Strategy very strictly; the debts are not taken haphazardly, and they are planned.
“They are appropriated, and then we borrow against appropriation.”
Borrowing more, especially in foreign currency, may just be a good way to fail, especially in an election year. Already, Nigeria faces increased Eurobond maturities after the next three or four years. When that time comes, our obligations to creditors will be, not only debt servicing but repayments also. Between 2027 and 2033, the country has Eurobonds maturing every year, with a cumulative total of about $9.50b, with yields ranging from 12.62 per cent to 13.13 per cent as of August 30. This is in addition to two bonds maturing next year and 2025 with the total amount of $1.618b., and others maturing after 2033.
The government must be guided by current events around us. Today, Ghana is fighting for survival as its Cedi recently fell as low as 10.0116/$ rate, from an exchange rate of about 6.275676/$ on January 31, 2022. That is about a 37.3 per cent depreciation! Nigeria has the chance now to avoid going the same way.