First interest-rate hike in 6yrs to worsen FG’s finances
Nigeria, which spent nearly all of its revenues on interest payments to creditors last year, will now pay more to borrow from local investors after the Central Bank of Nigeria (CBN) hiked benchmark interest rates for the first time since August 2016 on Tuesday.
The CBN hiked the base rate for lending by 150 basis points to 13 percent, effectively raising the cost of borrowing within the country.
At 96 percent of revenues, the federal government spent the most of any country surveyed by BusinessDay servicing debt in 2021 and is forecast by the International Monetary Fund to spend 92 percent of revenues for the same purpose this year.
The rate hike by the CBN means the government would spend even much more in the future to service its debt, painting a gloomy picture for the public finances of Africa’s largest economy.
The trend of rising global interest rates means external loans would be unable to provide any relief to the government, as external borrowing costs are also set to rise.
Low revenues, combined with high borrowing costs, worsen the growth prospects of Africa’s most populous nation, where unemployment is at a record-high 33 percent and businesses must contend with an infrastructure deficit that requires $100 billion in annual investments to fix, according to the Africa Development Bank.
This week, the National Bureau of Statistics (NBS) said the economy grew by 3.11 percent, but the oil sector, from which the government derives about half of its revenue, contracted by 26 percent as oil production fell to 1.4 million barrels daily.
The poor performance of the oil sector reduces the amount of money the government can generate from the sector.
The non-oil sector grew by 6.08 percent but the rate hike by the central bank which would also lead to higher borrowing costs for businesses may yet reduce their profitability and curb the government’s tax receipts, dealing another blow to another source of income.
Despite low revenues and less scope for borrowing, the federal government is worsening its fiscal situation with the continued insistence to sustain an expensive petrol subsidy practice.
The federal government’s estimated budget deficit rose nine-fold from earlier projections to N7.35 trillion in 2022, as it made room for a N4 trillion splurge on petrol subsidy.
The recent rate hike by the CBN is yet another reason for the government to ditch petrol spending and manage its debt stock more sustainably, especially as the hike may be the first of more to come.
“This rate hike may be the beginning of a process of normalising interest rates to be more market-reflective,” said Omotola Abimbola, a senior portfolio manager at investment bank Chapel Hill Denham.
“That will obviously impact negatively on the government’s borrowing costs,” Abimbola said.
Economists have long held the view that Nigeria needs to tap the private sector to be able to deliver robust economic growth, especially at a time of ailing public finances.
Nigeria’s presidential elections are due next year with the future of the country’s 200 million people dependent on whether the next president will prioritise attracting private capital to boost economic growth, create jobs and address rising poverty.