By Alaro of Nigeria
The Federal Government borrowed N20.1 trillion from domestic investors in President Tinubu’s first year in office, marking a 117% increase from the previous year. This surge has raised alarms about its potential effects on the economy, including increased inflation, higher debt service costs, and elevated borrowing costs for businesses.
Analysts warn that this sharp rise in government borrowing could exacerbate the already high inflation rates, potentially leading to further interest rate hikes by the Central Bank of Nigeria (CBN). This, in turn, would increase borrowing costs for both businesses and individuals.
The Federal Government borrows from domestic investors through the issuance of FGN Bonds, FGN Savings Bonds, and Sukuk Bonds by the Debt Management Office (DMO), as well as Nigeria Treasury Bills (NTBs) issued by the CBN on behalf of the FG.
According to financial data from the DMO and CBN, from June 2023 to May 2024, the government borrowed N20.09 trillion through these instruments, a significant increase from the N9.275 trillion borrowed in the same period the previous year. NTBs accounted for the majority of this increase, making up 66% of the total domestic borrowing during the period.
Borrowing Breakdown
Data from the CBN shows that the FG’s borrowing through NTBs rose by 188% year-on-year (YoY) to N13.235 trillion in the 12 months ending May 2024, up from N4.592 trillion in the previous year. Borrowing through FGN Bond auctions, which comprised 32.8% of total domestic borrowing, rose by 42% YoY to N6.476 trillion from N4.537 trillion. FGN Savings Bonds, making up 1.5% of the total, increased by 116% YoY to N29.17 billion from N16.07 billion.
Interest Rate Hike
The 117% YoY increase in FG’s domestic borrowing was influenced by the high interest rate environment, driven by the CBN’s hikes in the Monetary Policy Rate (MPR). The average MPR rose to 20.32% in the 12 months ending May 2024, up from 16.21% in the previous year. Consequently, the average interest rate on NTBs increased to 9.1% from 4.0%, and the rate on FGN Savings Bonds rose to 17.91% from 10.89%.
Despite the high-interest regime, analysts express concern that the surge in government borrowing is detrimental to the private sector, making business loans more expensive and potentially stifling growth.
Analysts’ Perspectives
Nnamdi Nwizu, Co-Founding Partner at Comercio Partners, noted that increased government borrowing typically leads to more spending, which can drive up demand for goods and inflate prices. He highlighted that higher borrowing costs for the government could crowd out private sector lending, as investors would prefer the safer government securities offering high returns.
Tunde Abidoye, Head of Equity Research at FBN Securities Limited, echoed these concerns, adding that government borrowing could indirectly affect exchange rates and intensify inflationary pressures. He suggested that the CBN might continue raising interest rates to control inflation.
Chinazom Izuorah, Senior Associate at an Investment Brokerage, argued that while higher interest rates on government securities attract more investors, reducing money circulation and thus limiting inflation, they also make private sector lending less appealing due to higher perceived risks.
Need for Moderation
Dr. Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE), emphasized the need for moderation in borrowing to avoid overheating the economy. He pointed out that borrowing, when financed through bonds and treasury bills rather than money printing, is less inflationary but can still crowd out private sector credit.
In summary, while the government’s borrowing strategy may support fiscal policy by funding the national budget, it poses significant risks to economic stability, requiring careful management to avoid adverse effects on inflation, private sector growth, and overall economic health.
