Domestic borrowings raise a red flag as Tinubu considers N30 trillion in new loans.

S&P issued a warning yesterday regarding the predicament in which a number of African governments find themselves: they are compelled to refinance domestic debts at exorbitant prices, while simultaneously overextending the funding capacity of their central banks to fill the chasm in their finances. This predicament has left many in dire straits.

According to The Guardian, the crisis is exacerbated by worldwide monetary contraction, which has rendered the global debt market unattainable or unaffordable for numerous developing nations.

At a multi-decade high of 5.25–5.5 percent, the Federal Reserve has increased interest rates; some market analysts anticipate additional increases prior to the conclusion of the tightening cycles.

The S&P report was released concurrently with the rate-setting committee of the Federal Reserve’s second-to-last meeting, which concluded yesterday without altering the prevailing interest rate.

The report, which provided a concise analysis of the domestic predicament faced by prominent African economies such as Nigeria, Egypt, and Ghana, is being released at a time when the administration of the largest African nation is grappling with the most formidable fiscal obstacles and attempts to maintain governance.

Prior to this, Wale Edun, Minister of Finance and Coordinating Minister of the Economy, assured Nigerians of concern that the government would not incur debt in order to finance its operations.

However, in spite of the growing scepticism of foreign financiers regarding the nation’s capacity to fulfil its commitments, they might have exhausted their reserves of cash in less than three months subsequent to the guarantee.

The Federal Government may procure a minimum of N8.7 trillion in advance of the 2024 budget presentation in order to contribute to the estimated N9 trillion deficit. Its aspiration is to generate N206 billion through the privatisation process, which has proven to be a fruitless and fruitless pursuit throughout the presidency of Muhammadu Buhari.

According to the Medium-term Expenditure Framework (MTEF) presented for deliberation in the National Assembly, the Federal Government’s deficit for the period spans from 2024 to 2026 and amounts to N30.7 trillion. Given that the privatisation of certain public assets is anticipated to yield less than N700 billion, the government anticipates obtaining the majority of the necessary funds from domestic and international debt markets.

The domestic market would, as anticipated, provide 21.4% or 71% of the debt financing. S&P has characterised the plan, which has been prevalent in fiscally stranded African nations ranging from Egypt to Ghana, as a significant crisis that ought to concern a great number of African leaders.

In the past, the federal government restructured an estimated N23 trillion borrowed from the Central Bank of Nigeria’s (CBN) ways and means (W&M) portal through the issuance of a discounted nine percent bond to the apex bank.

While numerous prominent economists and financial experts, such as Dr. Aye Teriba, cast doubt on the process’s veracity, Patience Oniha, the Director General of the Debt Management Office (DMO), confirmed in an email exchange with The Guardian that the debt restructuring had been finalised, with the DMO removing the debt from the CBN via bond issuance.

The S&P report from yesterday suggested that, similar to the CBN, numerous domestic financiers are implementing reductions on assets that are generating negative real interest rates.

“As a result, the expense of refinancing domestic debt has increased in tandem with central bank policy rates across the continent.” The report places considerable emphasis on wealth levels as a result of distinctions in domestic financing and financial systems. “As a result, governments that were prohibited from accessing foreign markets by the beginning of 2022 encountered domestic financing constraints almost immediately,” the report states.

While Nigeria does not rank among the countries most severely affected by the domestic debt refinancing crisis, including Egypt, Zambia, Mozambique, and Ghana, the nation undoubtedly confronts a formidable debt challenge, as evidenced by its debt-to-revenue ratio exceeding 100 percent, as reported by S&P Global Ratings’ Domestic Debt Index (DDI).

Documents obtained from the government indicate that the fiscal deficit reflected in this year’s budget performance is already estimated at N11.6 trillion, or more than 50 percent of the total budget (including supplementary) of N22.65 trillion.

The CBN, which previously granted unrestricted overdrafts to the Federal Government for its fiscal transgressions, has now entered into a commitment to adhere to the stipulations outlined in its enabling act with regard to its operations, including its function as a lender of last resort. Should this occur, the government may encounter a setback in the years to come as it prepares to carry on the fiscal irresponsibility that was widely criticised during the previous administration.

Teriba had expressed concern that the approximately N30 trillion capacity of the domestic debt market had been depleted.

The global monetary arena continues to be beset by obstacles. For example, the Federal Reserve left the door open for additional interest rate increases yesterday due to robust economic expansion and an inflation rate that remains higher than anticipated. An additional tightening would result in the market continuing to de-risk, which would have significant repercussions for emergent and frontier markets.

It is noteworthy that Nigeria has encountered its occasional peculiarities in securing financing. Recently, Highcap Securities Limited’s David Adonri characterised the purported CBN delays in fulfilling forward contracts as catastrophic and a prescription for financial disruption.

Additionally, Nasarawa State University professor Uche Uwaleke cautioned that the consequences are severe if not promptly examined. He defined non-compliance with forward contracts as being comparable to the default on sovereign debt.

Additionally, the nation has encountered a sequence of downgrades, which, according to specialists, have adverse effects on its capacity to obtain funds from the financial market.

This document reported at the onset of the current liquidity tightening last year that exclusion from the global financial system would force the nation to rely on the domestic debt market. Subsequently, there has been an increased dependence on CBN overdrafts and other local gateways, which has deprived the private sector of essential capital for growth and job creation.

The situation has fueled poor domestic financiers, according to an S&P report.

“The real rates of domestic debt in Egypt, Ethiopia, and Nigeria continue to be extremely negative.” Foreign investor interest in Egypt has decreased significantly since the inception of the COVID-19 pandemic.

“Among African sovereigns rated, Egyptian banks have the highest exposure to their sovereign in proportion to their total assets, at 40%, compared to the median of 17%.” The debt structure of Egypt is deemed generally poor by S&P. The report noted that Egypt is extremely sensitive to the global monetary tightening cycle.

Zambia and bilateral creditors reached a resolution in June 2021 regarding debt relief under the G-20 Common Framework, which the government had initially requested in February 2021. This year’s extremely feeble fiscal flow and stock measures, according to the report, represent one of the greatest threats to Zambia’s domestic debt-carrying capacity.

“Approximately fifty percent is domestic, up from thirty percent in 2018,” the report continued.

Additionally, the report noted that from February to May, the government of Mozambique repaid domestic commercial debt past due, which constituted a selective default on the country’s local currency rating.

At 18 percent of GDP, Mozambique’s domestic roll-over ratio is currently one of the highest in Africa.