By Chukwuma Umeorah
Nigeria is grappling with a significant budget deficit projected at N9.18 trillion for 2024. In an effort to address this shortfall, the federal government has raised N5.28 trillion through the FGN Bond market in the last 10 months of the year. This borrowing strategy, executed through the Debt Management Office (DMO), is intended to bridge the gap between projected revenues and expenditures, which has been a persistent challenge for the nation’s fiscal landscape.
Despite a robust subscription rate of N6.44 trillion against an offered amount of N5.48 trillion, concerns are mounting regarding the sustainability of Nigeria’s rising debt profile. The proposed budget for 2024 outlines a total size of N27.5 trillion, reflecting the persistent gap in government financing, which is becoming increasingly reliant on domestic borrowing to support crucial public services and infrastructure projects.
In the budget presentation, President Bola Ahmed Tinubu noted that the budget deficit would be financed by new borrowings totaling N7.83 trillion, N298.49 billion from privatization proceeds, and N1.05 trillion from drawdowns on multilateral and bilateral loans secured for specific development projects.
An FGN Bond is a debt instrument issued by the FG to generate funds for financing public projects and budgetary needs, with an assurance of repaying the principal at maturity and periodic interest payments, known as coupon rates.
The latest auction results from the DMO reveal a worrying trend as the government’s reliance on long-term debt instruments has intensified amid inflationary pressures that are affecting economic stability. Although investor demand for FGN Bonds remains strong, driven by the search for higher yields in a rising interest rate environment, the rising marginal rates could significantly impact the fiscal landscape. In October 2024, the DMO raised N289.6 billion, marking a 9.5 per cent increase from September; however, the implications of such borrowing continue to draw scrutiny from economists and financial analysts alike.
They caution against the long-term consequences of this debt accumulation, noting that while domestic bonds may offer attractive returns, they also heighten the risk of unsustainable debt levels. The marginal rates for the recent bond auctions have seen significant hikes, with the 5-year bond allotted at a 20.75 per cent marginal rate, a substantial increase from 19.00 per cent in September. Similarly, the 7-year bond rose to 21.74 per cent from 19.99 per cent, signaling growing concerns among investors regarding inflation and tightening monetary policies.
Chief Executive Officer at the Centre for the Promotion of Private Enterprise (CPPE), Muda Yusuf, commented on the government’s borrowing strategy, stating, “In light of the volatility we are experiencing in foreign exchange markets, it makes logical sense for the federal government to rely on domestic borrowing rather than seek funds internationally. However, this situation is a direct reflection of the macroeconomic challenges we face and underscores the pressing need for more robust fiscal policies to stabilize our economy.”
Furthermore, the potential for increased interest payments raises alarms about fiscal sustainability. The Vice Chairman of Highcap Securities Limited, David Adnori, cautioned that Nigeria’s debt levels had reached a point of concern. According to him, “Ways and means refer to the CBN’s lending to the federal government. The DMO said that the “securitization of ways and means” is not unusual and is a common practice in many countries, but it is not a decision that can be made by the DMO alone.”
He added that the current trajectory of borrowing was not sustainable, noting that while it is common practice in many economies to utilize bonds for financing, Nigeria’s growing debt burden necessitates a reevaluation of our fiscal policies. He added that if Nigeria continued to rely heavily on debt without corresponding growth in its revenue streams, it risked ending up in a precarious financial situation.
In addition, analyst and stockbroker, Tajudeen Olayinka, highlighted the evolving investor sentiment towards FGN Bonds, stating, “The appetite we are seeing for FGN bonds suggests that pension fund administrators and local investors are gravitating towards investment instruments that minimize volatility, despite the lower yields they may offer.
He added that this shift, however, also points to an underlying fear of interest rate risk, as many investors remain cautious due to the prevailing economic uncertainties and inflationary pressures which remain unabated. “So, investors expect higher yields for this particular issuance, while the government does not wish to borrow at higher interest.”
While the government has managed to raise substantial funds through FGN Bonds, these experts note that the long-term implications of this borrowing strategy could pose significant challenges to Nigeria’s fiscal health.