Nigeria in its proposed budget intends to borrow N2.57 trillion from international sources but the cost of the debt may be a major source of concern, considering that global interest rates are likely to rise.
Top economies have seen their inflation rate increase the highest in the past few months, which has led to an increase in global rates as they try to manage inflation and move away from the pandemic-induced low-rate environment.
For instance, the Bank of England last Thursday imposed back-to-back interest rate hikes for the first time since 2004, and began the process of quantitative tightening.
Markets had broadly expected the 25 basis point rate increase that the Monetary Policy Committee voted for 5-4, and which takes the main Bank Rate to 0.5 percent, as the central bank strives to contain soaring inflation. Four members voted to increase rates by 50 basis points to 0.75% percent.
The US Fed is also predicted to hike rates at least three times this year. Investors in the US and UK are among the top targets when Nigerian government officials go on roadshows to raise Eurobonds.
The rise in global interest rates, which may however elude the Eurozone, means Nigeria with debt service to revenue ratio of 70 percent last year would have to pay more on borrowing.
“If global rates are rising then we must brace for higher debt service costs,” said Bismarck Rewane, an economist and CEO of Financial Derivatives Company (FDC).
“The implication of this is that the government must find a way to either reduce borrowing or at least spend on revenue-generating projects that will soften the cost of the loans,” Rewane said.
The US, UK and Europe inflation rate soared to 7 percent, 5.4 percent, and 5.3 percent, respectively, last December, the most for these economies in more than three decades.
Assistant Vice President and Senior Portfolio Manager at Chapel Hill Denham, Omotola Abimbola, said, “When Global monetary policy is tightened, we will see upward pricing of interest rate and government policy rate. The cost of you raising new loans and servicing debts will also be higher.
“When we are in a global monetary tightening period, there are capital flow reversals in emerging and developing countries. However, for Nigeria, perhaps the good thing is that foreigners are not so heavily invested in local assets at the moment and that could reduce the impact of the increased global interest rates on the exchange rate.”
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In 2022, the Federal Government with a budget deficit of N6.39 trillion intends to borrow N2.57 trillion a piece from domestic and international sources.
The bulk of the funds will be used to service recurrent expenditure, which has drawn criticism from analysts who think the bulk of the dent should go to funding genuine capital expenditure that can generate revenues for the government.
The 2022 Appropriation Act shows that out of the proposed 2022 budget of N17.126 trillion, N3.6 trillion was budgeted to service outstanding local and foreign loans, N6.9 trillion on recurrent expenditure, and N5.96 trillion on capital expenditure.
Recently, the president of the African Development Bank (AfDB), Akinwunmi Adesina, and some prominent Nigerians expressed worry about Nigeria’s debt servicing. Although, Adesina agreed that the country’s debt to Gross Domestic Product (GDP) ratio was considered moderate and within acceptable limits at 33 percent.
But the big question economists are asking is how the country services its debt and the implication for domestic debts, which is needed to stimulate faster economic growth. This, according to the AfDB president, leaves Nigeria’s economy in a vulnerable situation.
