The Federal Government borrowed N20.1 trillion from domestic investors in the first year of President Tinubu’s administration, representing year-on-year YoY increase of 117 per cent from the previous year, prompting concerns over impact on the economy including likely additional pressure on inflation, increased debt service cost and higher borrowing cost from businesses.

Analysts noted that the sharp increase in Federal Government’s borrowing has the potential to compound the historic high inflationary trend in the country which may lead to further interest rate hikes by the Central Bank of Nigeria, CBN and by extension increased cost of borrowing for businesses and individuals.

The Federal Government borrows from the domestic investors through issuance of FGN Bonds, FGN Savings Bonds, and Sukuk Bonds by the Debt Management Office, DMO. In addition to these are the Nigeria Treasury Bills, NTBs, issued by the CBN on behalf of the FG.

Financial Vanguard analysis of data from the DMO and CBN showed that in the 12 months ending May 31st (June 2023 to May 2024), also the first year of President Bola Tinubu, the FG borrowed N20.09 trillion through these instruments, representing YoY increase of 117 per cent from the N9.275 trillion borrowed in the previous 12 months, namely June 2022 to May 2023.

Most of the increase in borrowing was through the NTBs auctions conducted by the CBN, which also constituted 66 per cent of FG’s domestic borrowing during the period.

Borrowing details

According to data from CBN, FG’s borrowing through NTBs rose YoY by 188 per cent to N13.235 trillion in the 12 months ending May 2024 from N4.592 trillion in the 12 months ending May 2023.

FG’s borrowing through the monthly FGN Bond auctions, which constituted 32.8 per cent of total domestic borrowing during the period, rose, YoY by 42 per cent to N6.476 trillion in the 12 months ending May 2024 from N4.537 trillion in 12 months ending May 2023.

FG’s borrowing through Sukuk Bonds, which accounted for 1.7 per cent of total domestic borrowing during the period, rose, YoY by 169 per cent to N350 billion in the 12 months ending May 2024 from N130 billion in the 12 months ending May 2023.

FG’s domestic borrowing through FGN Savings Bonds accounted for 1.5 per cent of total borrowing during the period, also spiked, rising YoY by 116 per cent to N29.17 billion in the 12 months ending May 2024 from N16.07 billion in the preceding 12 months ending May 2023.

Interest rate hike

Among other things, the 117 per cent YoY increase in FG’s domestic borrowing in the 12 months ending May 2024 was driven by investors’ response to the high interest rate regime during the period following hike in the Monetary Policy Rate, MPR by the CBN.

Analysis showed that the average MPR rose to 20.32 per cent in the 12 months ending May 2024, representing 4.11 percentage points increase from 16.21 per cent in the preceding 12 months ending May 2023.

As a result, the average interest rate on NTBs rose to 9.1 per cent in 12 months ending May 2024, representing 5.1 percentage points from 4.0 per cent in the preceding 12 months ending May 2023.

In the same vein, the average interest rate on FGN Savings Bond rose to 17.91 per cent at the May 2024 auction from 10.89 per cent at the May 2023 auction.

Analysts’ comments

Notwithstanding the influence of the high interest rate regime, analysts expressed concern that the sharp rise in FG’s borrowing from domestic investors is harmful to the private sector as it makes it more costly for businesses to borrow.

The analysts were however divided on the impact of the borrowings on inflation.

Commenting, Co-Founding Partner, Comercio Partners, a Lagos based investment bank, Nnamdi Nwizu, said: “The increase in borrowing by the government means that there will be more spending by the government, which will have a huge impact on inflation as it will drive demand for goods. Governments are always the largest spender in the world, so the more money they spend, the higher the attendant inflationary pressure. Note also that since they are borrowing at record levels, it means that when they are servicing the debt, they will put a lot more funds in the hands of the public.

“Lending to the Private Sector has been impacted with corporates issuing bonds and Commercial Papers at record levels.

“Whilst we continue to see a lot of issuances by the private sector (above 25% yields), we also see that the smaller corporates are struggling as the government is crowding them out. If an investor can invest in one year risk free NTBs at 25% yields, they would naturally ask for a premium when lending to the private sector. How many companies can afford to borrow at these steep levels and still be profitable? Also, the higher lending rates will lead to inflationary pressures as the corporates have to increase prices to cover for the higher borrowing rates.

“With respect to fiscal policy, we are yet to see the borrowing by the government have an impact on fiscal policy. Yes, we have the Coastal roads being built, but we would like to see more with regards to policies to help increase production output in the economy. Also, we expect to see a significant increase in debt servicing costs, factoring in the higher rates and increase in domestic borrowing.

“With respect to monetary policy, whilst the Central Bank continues on its hawkish trend, we expect pressure from the government on the Central Bank as its debt service costs rise. The government cannot afford to borrow at these levels for an extended period of time. Government spending can also lead to more pressure on the currency as it means more Naira available to chase the greenback.”

Similarly, Head of Equity Research, FBN Securities Limited, Tunde Abidoye, said: “Government borrowing could potentially fuel inflationary pressures. In addition there’s an indirect effect on exchange rates. Also, there’s the crowding out effect for private sector lending. As it is, not many businesses can afford to borrow at the elevated interest rate. Finally, the monetary policy response to all this may be to continue to raise interest rates in a bid to tame the spiraling inflation.”

However, Chinazom Izuorah, Senior Associate, Investment Brokerage, differed on the impact of the FG’s domestic borrowing on inflation, though she also noted it will make it costly for businesses to borrow.

She said: “The Federal Government’s domestic borrowing program has not changed in the last year. The government’s calendar for offering FGN bonds, savings bonds and Treasury bills remains consistent and in line with historical practice.

“The reason for the increase in value is due to the increase in MPR and the knock-on effect on interest rates for the FGN securities.

“At interest rates of 17% and above, the government’s instruments are more attractive than in the previous year and consequently there is increased interest and participation. This is also consistent with the CBN’s objective of reducing inflation by mopping up liquidity. In simple terms, higher interest rates create an incentive to save.”

She stated the impact of this in terms of inflationary pressure is that with the greater incentive to save, there will be less money in circulation which is crucial to limiting inflation.

“In terms of lending to the private sector: Higher interest rates on government securities, which are considered the safest instruments, is a disincentive to lending to the private sector, which is considered riskier.

“Money tends to fly to safety. Banks, other financial institutions and fund managers have little incentive to take-on riskier assets when they can get attractive returns lending the funds to the government.

“On the fiscal policy front the government uses the funds raised through the issuance of securities to fund the national budget. The present administration has earmarked a significant portion of the budget to capital expenditures, portions will also be used to fund recurring expenditures and debt service.

“The higher interest rates mean that the government is paying a higher rate to investors.

“However domestic borrowing is more sustainable than external borrowing as the monies are borrowed in the local currency. Governments look to external borrowing due to lack of capacity to meet funding needs from the domestic market.

“There is a lot of benefit to having a financially literate citizenry and high domestic savings rates. The most critical issue for Nigeria and Nigerians is that monies are judiciously employed for the purposes they are raised and projects executed efficiently.

“The increase in domestic borrowing values is indicative of the success of the administration’s monetary policy positioning.

“It can be assumed that the sustained rise in the MPR has been favorably received by the market and has stimulated increased participation in the domestic bond market.”

Moderation needed to avoid economic overheating — Muda Yusuf

Also commenting, Dr Muda Yusuf, CEO of Centre for the Promotion of Private Enterprise (CPPE), said there is a general need to moderate borrowing so that it doesn’t overheat the economy.

His words: “With respect to the implication for inflation, the deficit if financed properly may not be inflationary.

“Inflationary component of deficit financing often arises when CBN prints money to finance the deficit. That is when you have serious issues with inflation, because the money is now what you call high-powered money. But if it’s funded using bonds, treasury bills and other firms of borrowing, either from the public or from within the financial system, it is less inflationary.

“If the debt level continues to increase, of course it has a crowding out effect on the private sector. That means more of the credit in the economy will be going to the government as against the private sector, which is not a particularly good thing. So we need to worry about a trend of increasing domestic debt because of the risk of crowding out the private sector in the credit market.

“For fiscal policy, it’s a fiscal policy instrument. Borrowing is a fiscal policy issue, it’s used to fill the gap. Again, what is important is to maintain a sustainable ratio as far as borrowing is concerned, ratio of debt service to revenue, ratio of debt to GDP, which generally under the present administration have improved.

“For monetary policy, not much implications for as long as the deficit is not financed by CBN. That for me does not pose too many issues.

“Again generally, we need to moderate borrowing so that it doesn’t overheat the economy, and it doesn’t trigger the desire of the financial authorities to begin to tighten monetary policies.

“But for monetary policies, the significance of these borrowings is not so profound. It’s essentially a fiscal policy issue.” (Vanguard)

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