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N23.70 trn Ways and Means Loans to Drain Liquidity in Financial System

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The plans by the Federal Government to move the Ways and Means loans into the financial system will drain liquidity as the outstanding value is even bigger than the entire pension assets of Nigeria, according to analysts at CSL Stock broker’s Limited.

The government plans to securitize the ways and means loan of N23.72 trillion ($53 billion) into a 40-year bond at 9.0 percent.

Of course, the asset or borrowing under the financing by the Central Bank of Nigeria (CBN) was a contentious issue in the National Assemble as some legislators claimed it was opaque, illegal, and unconstitutional and demanded more clarity.

However, the lawmakers who blamed the Minister for Finance Zainab Ahmed and CBN governor Godwin Emefiele for stalling the approval of the request by delaying the provision of the necessary document containing details of the Ways and Means Advances have approved the N22.70 trillion debt structuring presented by the president Muhammadu Buhari.

The president had noted that failure to pass the bill would cost the government about N1.8tn in additional interest payment in 2023.

“In our view, moving the asset into the financial system will drain liquidity, as the outstanding value is even bigger than the entire pension fund in Nigeria. Also, if the government introduces the facility into the capital market, the proposed 9.0% rate is clearly not viable, given the rising rate environment,” said analysts at CSL Stockbrokers.

“Hence, we think that the securitization could be in the form of an accounting treatment, wherein the liability reflects on Nigeria’s debt position, but there is no cash movement,” said analysts at CSL Stockbrokers.

The Director-General of the DMO, Patience Oniha, said that the country’s debt profile will cross N70 trillion with the new borrowings from the CBN.

The country’s debt profile hit N44.06 trillion in the third quarter of 2022 from N39.56 trillion at the end of 2021, data from Debt Management Office (DMO) said.

A trend analysis by CSL Stockbrokers shows Ways and Means stood at N900 billion in 2015, N2.20 trillion in 2016, N3.3 trillion in 2017, N5.40 trillion in 2018, N8.70 trillion in 2019, N13.10 trillion in 2020, N17.90 trillion in 2021, and N23.70 trillion in 2022.

Lower government revenue due to volatility in the price of crude and theft of crude oil combined with the recessions of 2016 and pandemic malaise have forced the president Buhari led administration to embark on a borrowing spree.

Of course, there are concerns about debt sustainability as Nigeria’s debt service to revenue ratio has risen to 81 percent in 2022 as debt to GDP nears 40 percent, but still one of the lowest among Sub-Saharan African countries.

“The generally rising concern around debt sustainability could also be an incentive for investors to price treasury instruments at a higher yield, and we think this would have a higher effect on the market direction together with the potential pricing of political risk,” said analysts at Meristem Securities.

“Thus, we expect the fixed income yield to rise in 2023, albeit at a gradual pace,’’ said analysts at Meristem Securities.

There are indications the government will continue to utilise the Ways and Means financing window this year as the need to manage borrowing cost amid a rising cost of debt could dissuade it from borrowing heavily from the public market.

Finance Minister Zainab Ahmed has hinted that the government who was forced to suspend the issuance of its planned $950 million Eurobond may not tap into the international debt market in 2023 due aggressive tightening cycles by global central bankers that are responsible for rising bond yields and interest rates.

The global economy has been hard hit by supply chain bottlenecks exacerbated by the Russia and Ukraine war and higher energy prices, stoking inflationary pressures and disruption of asset prices.

Nigeria’s 2022 major highlight in the Eurobond market was the 8.50 percent $1.25 billion 7-year Eurobond issuance.

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