The federal government will hold its regular primary auction of new bond issues today to raise an additional N225 billion from the domestic capital market.
Investment firms redoubled their efforts to market new issues ahead of the auction over the weekend, with figures collected from many firms suggesting new issues may be oversubscribed.
The government had raised more than N450 billion from the domestic capital market through bond issuance in the past two months.
The prospectus issued by the Debt Management Office (DMO), which oversees the federal government’s debt issuance and management, suggested the government would raise N225 billion through the reopening of three previously issued intermediate to long-term bonds.
Reopened bonds include the 10-year 13.53 percent bond maturing in March 2025. Also reopening are the 10-year 12.50 percent bond maturing in April 2032 and the long-term 20-year bond issue with an initial coupon of 13.00 percent and maturing in January 2042. The previous stop rates on the bonds are 11 .00 percent; 13.00 percent and 13.749 percent, respectively.
The government plans to raise N75 billion each from the three bonds, for a total of N225 billion. Nigeria relies on regular debt issuance to fund budget deficits as poor infrastructure and insecurity continue to threaten government revenues.
The DMO had reported that Nigeria’s total government debt had risen to N41.6 trillion, or US$100.07 billion, by the end of the first quarter of 2022, up 5.16 percent, or N2.04 trillion, from 39, N56 trillion or $95.78 billion recorded as of December 31st. 2021
The total national debt stock included domestic and foreign debts of the federal, state and federal capital territory governments.
The DMO found that the total stock of government debt included new domestic bonds issued by the federal government to fund the deficit in the Appropriation Act 2022, the US$1.25 billion Eurobond issued in March 2022, and facilities from multilateral and bilateral lenders.
Data from the Central Bank of Nigeria (CBN) showed that lending to the federal government through the central bank’s channels and funds increased from N17.46 trillion in December 2021 to N19.01 trillion in April 2022, an increase of 1. N55 trillion equals over the four month period.
Section 38 of the CBN Act of 2007 authorizes Apex Bank to make temporary advances to the federal government in respect of a temporary lack of budgetary revenue at a rate that Apex Bank may determine. However, the total amount of these advances may at no time exceed five percent of the federal government’s actual income for the previous year.
Analysts at Afrinvest estimated that Nigeria’s debt-to-GDP ratio at the current rate of borrowing would surpass the DMO benchmark of 40 percent by 2030, with inflation and exchange rate risks on domestic and foreign borrowing adjusted accordingly.
Analysts noted that the debt service-to-sales ratio hit an all-time high of 96.0 percent in 2021 versus 30.9 percent before slipping slightly to 85.8 percent in the first quarter of 2022, indicating rising illiquidity.
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Analysts said that deficit spending and rising debt numbers have pushed Nigeria’s economy “deeper down the rabbit hole” as the debt-to-GDP ratio rose to 23.3 percent in the first quarter of 2022, from 21.6 percent at the start of 2021, or 13.2 percent in 2015.
Lukman Otunuga, senior research analyst at FXTM, said Nigeria’s soaring budget deficit poses a major threat to the country’s long-term economic prospects.
According to him, a growing budget deficit and resulting debt portfolio could undermine economic sustainability, with far-reaching consequences such as unemployment, devaluation, greater vulnerability and a deepening financial crisis, among others.
In a review, Otunuga said Nigeria’s rising debt profile has become a perfect example of how excessive government spending can put an economy in an awkward position, despite its mission to boost growth.
According to him, there is almost a global consensus that Nigeria’s mounting budget deficit threatens its long-term prospects.
He noted that Nigeria, Africa’s largest economy, has spent in excess of its earnings over the past 10 years, with the International Monetary Fund (IMF) forecasting the government deficit to widen from 6.0 to 6.4 percent of gross domestic product (GDP) in 2022 will expand percent in 2021.
He pointed out that while Nigeria’s public debt is expected to reach 44.2 percent of GDP by 2027, one of the main dangers of a budget deficit is continued inflation.
“If the deficit forces the Central Bank of Nigeria (CBN) to release more money into the economy, it could lead to inflationary pressures and threaten economic growth. It doesn’t end here; Rising debt lowers Nigeria’s national savings, encourages spending cuts, reduces the ability to respond to domestic and external shocks and, most importantly, increases the risk of a financial crisis,” Otunuga said.