Nigeria’s growing borrowing costs on local bonds have jumped to a five-year high, adding pressure to a debt service burden that consumes more than two-thirds of the country’s revenue.
A few days ago, the World Bank in its new report said the country ranks consistently among the world’s poorest-performing countries in terms of public revenue mobilisation, with total revenues averaging just seven per cent of Gross Domestic Product (GDP) between 2015 and 2021 — far below the global average of 24 per cent.
The bank had stated that low tax rates and poor utilisation of tax bases, weaknesses in tax administration, and large deductions from oil revenue were constraining Nigeria’s inability to generate enough revenue.
But according to Bloomberg, average yields for local-currency-denominated sovereign bonds have risen to 14.84 per cent as of Thursday from 11.79 per cent in May, the month the Central Bank of Nigeria (CBN) started hiking its benchmark interest rate to curb accelerating inflation that hit a 17-year high in October.
Since May, the apex bank had lifted rates by 500 basis points to 16.5 per cent, boosting interest rates on government paper.
The federal government last week sold N199 billion ($500 million) worth of 364-day bills at a yield of 14.84 per cent, the highest since February 2019.
While the bills were oversubscribed, the Debt Management Office (DMO) only allotted about half the amount it planned to sell, pushing back on the higher yields demanded by investors.
Though interest rates have jumped, they still lag inflation at 21.1 per cent, a discrepancy the central bank said it planned to correct by raising rates until the gap is closed.
The risk of having negative real interest rates is that it discourages investment in the domestic market, said Hassan Mahmud, Director of the monetary policy department at the CBN.
“We need to sanitise the market so that the government can also in the future have a domestic source where it can raise the funds,” he said.
Bids at government debt auctions are already faltering due to the lower-than-inflation yields on offer.
The subscription rate for a 14.5 per cent bond due in 2029 was 9.8 per cent of the N75 billion debt offering in October, the lowest since December 2018.
The weak appetite for short-tenured debt forced the DMO to make more allotments in the longer-dated 15 to 20-year issuances, where investors sought more than the government was willing to sell – but at higher yields.
The DMO sold the bond due in 2037 at 16.2 per cent, the highest yield since August 2017. That raises the pressure on the government’s debt service costs even further.
As of August, debt service consumed 84 per cent of revenues and the World Bank projected that it could rise to 169 per cent of income by 2025 if the government fails to implement fiscal reforms.
The apex bank is concerned about how inflation is shrinking disposable income but doesn’t plan to ease policy until it sees inflation declining to around 12 -15 per cent.
According to Mahmud, “so long as inflation is going up, the real value of income is also eroded.”
The federal government has ruled out selling bonds on international debt markets this year after it shelved a proposal to raise about $950 million in May, citing unfavourable market conditions after Russia invaded Ukraine.
“I think this would be an opportunity for the government to find other alternative channels of raising funds,” Mahmud added.
Ndubuisi Francis in Abuja with agency report