Federal Government shifts borrowing focus to domestic market due to high international borrowing costs

In response to the escalating costs of international borrowing linked to the significant depreciation of the naira, the Federal Government of Nigeria has altered its borrowing strategy. It now plans to finance the N9.05 trillion deficit in the 2023 budget primarily through the domestic financial market, as outlined in the Medium Term Expenditure Framework (MTEF) for 2024-2026, released recently.

For several years, the Nigerian government has heavily relied on Eurobonds, bilateral agreements, and support from institutions like the World Bank and International Monetary Fund to meet its deficit financing requirements.

In the 2023 budget, the federal government has allocated just 31.9% of the N11.6 trillion deficit to domestic borrowing, while the majority, 68.1%, is financed through foreign borrowing.

However, the MTEF for 2024-2026 indicates a significant shift, with over 66% or approximately N6.0 trillion of the total N9.05 trillion deficits in 2024 being sourced from the domestic market. This change is driven by the implications of the 2023 deficit financing structure, which, when combined with the massive depreciation of the local currency, has resulted in significantly higher borrowing costs in 2023 and 2024.

The 2024 budget already places a heavy emphasis on servicing loans, and the debt service to revenue ratio has deteriorated further in 2023 and is expected to continue in 2024.

Financial analysts have suggested that while the higher budget figure for 2024 may be influenced by anticipated higher revenue from foreign exchange sales, any gains made will be offset by foreign debt servicing costs. 

Analysts from CardinalStone Finance in Lagos highlighted that the increased focus on domestic debt sourcing aligns with their projections of further weakening in the naira, which could result in higher costs for external debt financing.

Despite the potential foreign exchange translation gains due to the significant currency devaluation in 2023 and anticipated future depreciation in 2024, foreign debt servicing costs and reduced oil inflows present significant challenges. To address foreign exchange illiquidity and ensure economic stability, the finance minister has indicated the government’s intention to seek a $1.5 billion extended credit facility from the World Bank, a crucial step in providing relief.

Investment house Afrinvest West Africa expressed skepticism about the fiscal plan outlined in the three-year MTEF, citing potentially flawed assumptions regarding Nigeria’s economic performance. They pointed out the potential negative impacts on oil prices and capital inflows due to geopolitical tensions, slowing global growth, and interest rate hikes on global oil demand. Additionally, concerns were raised about the steep depreciation of the naira driven by demand-supply imbalances, dwindling foreign capital inflows, reduced oil production due to large-scale theft, and infrastructure deficits.