Balancing Debt Dynamics for Sustainable Growth

By Chinedu Okoye 

Overview and Background:

The World Bank has approved a $2.25 billion facility to the federal government of Nigeria at about 1% interest for a duration of between 10-20 years. This comes in addition to the trillions of Naira raised mainly from foreign investors at the Treasury Bills auctions.

The Finance Minister is essentially trying to balance out shorter-term foreign credit (FPIs) with loans and (USD Denominated) Bonds to reduce costs and overreliance on short-term debt at high double-digit rates.

The debt serves two purposes: funding and FX supply, and the concessionary facilities from the World Bank provide much-needed credit without further squeezing the available fiscal space.

FX Supply Breakdown:

The FX Supply has been due to Diasporan Remittances, Foreign Portfolio Investments (into Treasury Bills), and Oil Receipts. But although these NTB Issuances provided short-term support to the FX market, there was always a concern that in the absence of successful debt issuances, the Reserves could deplete further.

This created a need for additional funding. Having run through $2.06 billion dollars of our reserves in the past 4 weeks, on the back of credit from Foreign Investors and creditors, the $2.25 billion from the World Bank more than covers for this and provides much-needed support for the Naira appreciation. 

Afriexim Bank also disbursed $2.25 billion to the Federal Government under the Crude-for-cash deal signed last year for a total of $3.3 billion. The balance of $1.05 billion will be disbursed in May. Adding the World Bank facility and the remainder of the Afriexim Bank loan, the country can expect a total of $3.3 billion between now and May's end.

Balancing out Duration and Minimizing Costs:

Unlike the NTBs, the World Bank Loan is long-term and requires a debt service cost of no more than $22.5 million annually. The Afrexim Bank deal is to be paid in Crude and so does not inflict direct pressure on the Foreign Reserves.

The plans to issue Dollar FGN Bonds targeting $30 Billion idle Domiciliary Account idle balances also suggest a move to balance long-term debt (World Bank and Afriexim Bank Loans and FGN Dollar Bonds) with short-term Debt (NTBs).

Zero Equilibrium economists emphasized, in our article "Dissecting Nigeria's Foreign Capital Inflows: A Case for FDIs over FPIs for Balanced growth and Long-Term Prosperity" the need for longer-term financing as overreliance on short-term debt puts pressure on the reserves and the currency (Naira) by extension.

This is in the same manner reliance on Crude for FX earnings exposes the Apex Bank's Reserve position to external sources. Hence, we made a case for leveraging our assets to attract FDIs.

However, FDIs take time, and quick FPIs are costly, so in the interim, the finance chief has resorted to the next best thing: balancing long-term and short-term debt and diversifying credit sources to minimize costs while leveraging our resources for credit (Afriexim Bank Syndicate d loan) and also diversify the country's credit sources. There are all plans to diversify the country's revenue and income streams to Non-Oil sectors. 

Naira Effects:

This debt mix could sustain the supply of FX liquidity to the markets and alleviates the fears of over-relying on NTBs. Long-term single-digit concessionary loans are supportive in that the Federal Government has a longer time to return the principal to the World Bank at the cost of 1% annual interest rates. No private creditor will lend this much for this long at 1%.

The diversification reduces the exposure to shocks in certain segments of the markets. It also provides funding to sustain the subsequent short-term inflows into NTBs as Nigeria is in competition with the likes of Egypt and Ghana with higher rates on their 90 to 354-day Treasuries.

Our Analysts project a stable outlook for the Naira as the concerns over short-term funding have been alleviated given these developments. The stronger Naira is expected to gradually feed into prices or the FX portion of inflationary pressures as there are other factors that affect prices.

Remarks:

The measures undertaken by the Nigerian government, including securing a $2.25 billion facility from the World Bank, the Afriexim Bank loan, and planned Dollar FGN Bond Issuances, represent a strategic move to address various economic hurdles. This diversifies funding sources, balances short-term and long-term debt, and reduce reliance on volatile foreign portfolio investments.

Concessional loans with favorable terms; low interest rates and longer repayment periods, could alleviate pressure on the reserves, sustain FX liquidity, and support the Naira. Overall these initiatives contribute to stabilizing the economy, mitigating inflationary pressures, and enhancing long-term growth prospects.