Debt service weight set to soar as local borrowing costs spike


The federal government’s borrowing costs on local bonds have jumped to a five-year high, adding pressure to a debt service burden that consumes more than two-third of the country’s revenue. 

Revenue in Nigeria has fallen short of the government target by at least 45 per cent since 2015, and shortfalls have been funded through increased borrowing.

The World Bank warned that debt service which is 84 per cent of revenue could soar to 169 per cent by 2025.

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 started hiking its benchmark interest rate to curb accelerating inflation that hit a 17-year high in October. 

The Central Bank of Nigeria has lifted rates by 500 basis points since May to 16.5 per cent, boosting interest rates on government paper. The 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 office only allotted about half the amount it planned to sell, pushing back on the higher yields demanded by investors.

While interest rates have jumped they still lag inflation at 21.1 per cent, a discrepancy the central bank says it plans 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 in the monetary policy department at the central bank.

“We need to sanitise the market so that government can also in the future have a domestic source where it can raise the funds,” he said.

Nigeria to Raise Benchmark Rate Until Gap With Inflation Closes.

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 offered in October, the lowest since December 2018.

The weak appetite for short-tenured debt forced the Debt Management Office 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 projects it could rise to 169 per cent of income by 2025 if the government fails to implement fiscal reforms.       

The central 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 per cent to 15 per cent, Mahmud said. “So long as inflation is going up, the real value of income is also eroded,” he said.

The West African nation has ruled out selling bonds on international debt markets this year after it shelved a proposal to raise about $950 million in May, citing unfavorable market conditions after Russia’s invasion on Ukraine.

“I think this would be an opportunity for also the government to find other alternative channels of raising funds,” Mahmud said.

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