Interest Rates Heat Up to Heighten Nigeria’s Debt Costs
Godwin Emefiele, CBN Governor

Interest Rates Heat Up to Heighten Nigeria’s Debt Costs

With a plan to borrow about N3.8 trillion to support the adjusted 2022 budget, global interest rate heat up could heighten Nigeria’s debt costs. Some African countries and advanced economies reacted to the rising inflation rate with an upward adjustment to interest rates, according to Fitch Ratings.

Nigeria plans to spend more than N17.127 trillion in 2022, which is more than 26% of the previous year spending plan. A budget deficit of about N7 trillion is expected to be financed by local and foreign currencies borrowings.

MarketForces Africa reported that fresh borrowing plans for the current year are expected to push the nation’s total public debts of N38 trillion higher, thus associated debt service costs. Read Also: Debt levels in developing countries heighten vulnerability

Already, budgeted borrowing costs for 2022 is about 20% above the previous year spending.  

Budget data shows that Nigeria plans to borrow N2.51 trillion from domestic sources, N2.51 trillion from foreign sources, N1.16 trillion from multi-lateral/bi-lateral loan and privatization proceed of ₦90.7 billion.

For Nigeria, debt service costs would suffer double barrel shots injuries; from a weak local currency eclipsed by dollar strength and possibly, higher borrowing rates – both in the local and foreign debt markets.

By Consensus, analysts are seeing an end to low-interest rate environment this year. Borrowing costs had surged in the first half of 2021 due to higher issuance but later moderated in the second half.

Despite this, for the year, fixed income market instruments rates edged higher by about 4% from the beginning of the year.

Having maintained a less hawkish interest rate environment, the monetary policy authority successfully keep the benchmark interest rate at 11.50% amidst the bond-buying slowdown in the United States.

Fed’s Reserve is expected to hike interest rates twice in 2022, thus making frontier and emerging market economies less attractive for investment.

Some analysts think there would be fresh policy redirection, the CBN would likely turn hawkish to drive foreign investment into the country amidst a heavy dollar shortage.

Naira has suffered setbacks across foreign exchange markets due to the disequilibrium position between demand and supply of the greenback.

It is not unlikely to see 100 basis points upward adjustment in the first half of 2022, an investment banker who crave anonymity told MarketForces Africa.

Though heavy, Nigeria’s borrowing costs was well managed since October 2019 when the CBN via a circular restricted purchase of open market operations (OMO Bills) by non-bank financial institutions.

With large funds seeking investment window, yield in the fixed income market had dropped off significantly. Debt Management Office rode on the low-interest rate environment to reduce borrowing costs – a stance pushed by the apex bank to support the real sector of the economy.

“It will last no longer following the frontier market interest rate adjustment to combat rising inflation rate”, analysts informed MarketForces Africa. But, some businesses don’t see much difference in the lending environment in terms of borrowing costs.

While blue chips companies were able to renegotiate, restructure the debt position of their respective capital structure, others without strong credit positions say they paid 30% interest rates on borrowings.

Average lending rates remain heavily price for small and medium scale enterprises, according to the CBN lending rates report. Banks charges are very much heavily priced, casting doubt on the general feel that Nigeria operates a low-interest rate environment.

Global Central Banks are shifting to tightening mode and interest rates may start to rise for advanced countries. Nigeria, interest rates may most likely rise to deter investors from exiting the economy, according to analysts. # Interest Rates Heat Up to Heighten Nigeria’s Debt Costs