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Tuesday, October 3, 2023

Nigeria’s N15.4 Trillion Domestic Debt Binge Getting Cheaper to Finance

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Nigeria’s Federal government is binging on domestic debt which hit a record high as at June 2020, but one positive for policymakers in Abuja is that the FG is paying less as it borrows more.

Interest payments on the federal domestic debt declined by about 2 percent in the first 6 months of the 2020 fiscal year, compared to the same period in 2018, even as total domestic debt surged by 27 percent to N15.4 trillion as at June this year from N12.15 trillion in 2018.

Data compiled by MoneyCentral shows that domestic debt service payments fell to a low of N609 billion between January and March 2020. This compares to the N610.2 billion spent on domestic debt service in the January to March 2019 period and N643.6 billion spent between January and March 2018.

MoneyCentral calculations show that the average interest rate on the domestic debt fell to an annualised 11.92 percent in June 2020, compared to 12.3 percent in June 2019, and 15.46 percent in June 2018.

Borrowing costs are sliding on Central Bank of Nigeria (CBN) policy interventions. The CBN under Godwin Emefiele has gone full Financial Repression mode with numerous policies including its elevated Cash Reserve Ratio (CRR) requirements, that now has over N9 trillion in CRR, locked up in the banks vaults earning zero.

The CBN has also engineered captive lending to the Federal Government (FG) through its open market operations (OMO) policy ban for Pension Funds, which is forcing them to buy below inflation yielding FGN bonds.

Data from the FMDQ shows that one-year Treasury Bills yield 3 percent while benchmark 10 year bonds yield about 8.5 percent, well below the inflation rate of 12.5 percent.

Various CBN policy requirements have helped to cap interest rates, limited cross-border capital movements (the latest being a ban on FX for imports of maize), and tightened its grip on banks through heavy “moral suasion.”

The CBN interventions have plunged Treasury Bills and FGN Bonds yields to record lows. FGN Bonds made up 72.73 percent (N11.24 trillion) of domestic debt as at June 2020, while Treasury Bills were equivalent to 17.86 percent or N2.76 trillion.

While borrowing will not always be this cheap for the FG it could probably sell more short term notes to take advantage of the historically low yields relative to longer tenors.

Interest payments on Government holdings of Treasury bills fell  by 59 percent to N155.2 billion in June 2020 from N379.4 billion in June 2018, MoneyCentral analysis of FG debt data shows.

The FG projects a deficit of N5.2 trillion or 3.67 percent of GDP this year. Bonds issued to fund the shortfall have pushed the total public debt to N31 trillion, the Debt Management Office (DMO) said in a recent report.

Concerns about Nigeria’s debt burden have been voiced by officials from the opposition PDP in recent weeks. The ruling APC can take solace in the fact that the costs to service that rising debt are at historic lows, for now.

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