BusinessDay

FG’s growing appetite for debt ignores fiscal alarm bells

Nigeria is not heeding calls to cut compulsive spending and manage a ballooning debt service cost that the International Monetary Fund (IMF) predicts will gulp 92 percent of public revenues this year.

Rising global interest rates has made it more expensive for frontier and emerging markets to borrow money from the international market, yet Nigeria’s debt appetite remains high as government expenses pile. This year, Abuja increased its spending plans to make room for a nine-fold increase of a controversial petrol subsidy.

The government is planning another Eurobond sale of $950 million in May, according to Zainab Ahmed, the finance minister. That will be the second time this year that the government is tapping a volatile Eurobond market that many sovereigns have steered clear off for fear of high pricing.

Nigeria’s return to the international debt market at a time investors are wary of the volatility across financial markets shows the government’s urgent need for cash.

Wasteful spending like the petrol subsidy will continue this year, gulping nearly a third of the federal budget and pushing the budget deficit to the highest in 23 years, according to Central Bank data compiled by BusinessDay.

“The sad reality is that the federal government is running a very large deficit which cannot practically be funded only from the local markets,” said Egie Akpata, chairman of Lagos-based financial advisory firm, Skymark Partners Limited.

Some analysts had expected the government to return to the market much later than the new May timeline given by the finance minister.

“Eurobond yields have been rising, so the sooner Nigeria sells a new issue, the cheaper it would be relative to waiting till later in the year,” Akpata said.

“The issue would likely be successful, but Nigeria may pay a substantially higher rate than the recent March issue” Akpata added.

Read also: Why economy remains key to unlocking Nigerian capital markets — experts

Nigeria successfully issued the continent’s first Eurobond in 2022, raising $1.25bn in March at the cost of 8.375 percent, a premium over its dollar bonds due 2028, which were trading at a 7.83 percent yield at the time.

The sale shocked global fund managers who felt the market conditions did not support a Eurobond issue on the back of rising funding costs which was partly fueled by Russia’s invasion of Ukraine.

“It was unexpected,” Tatonga Rusike, the London-based sub-Saharan Africa economist at Bank of America Corp, said of Nigeria’s Eurobond sale.

“Our base case expectation for Nigeria’s issuance was in the second half” of the year, Rusike said, though admitting that despite high oil prices, the government continues to run a budget deficit, requiring external financing.

Nigeria, which should benefit from the rally in oil prices, is unable to do so due to challenges from oil theft to low production and the rising cost of the petrol subsidy bill which the government said it was taking the Eurobond to partly fund.

The World Bank estimates Nigeria’s subsidy bill will top N4 trillion ($9.6 billion) this year.

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