October 23, 2023

High cost of borrowing: FG targets domestic market to fund N9.05trn budget deficit

2023 Budget

•As naira depreciation bloats foreign borrowing cost
•Analysts point to downside projections of the plan

By Emeka Anaeto, Business Editor

The apparent high cost of borrowing internationally, following the massive fall in the value of the naira, may have forced the federal government to reverse its borrowing plan to fund the N9.05trillion deficit budget from the domestic financial market as indicated in the Medium Term Expenditure Framework, MTEF, 2024-2026, released at the weekend.

The FG had relied heavily on Eurobond and other sources, including bilateral and World Bank/ International Monetary Fund, for its deficit financing needs for several years now.

FG’s 2023 deficit amounting to N11.6 trillion is being funded with just 31.9 per cent domestic borrowing, while the bulk of the deficit funding at 68.1 percent was raised from foreign borrowings.

In the MTEF 2024-2026, released at the weekend, the government indicated that over 66 percent or about N6.0 trillion of the total deficits amounting to N9.05 trillion in 2024 would be raised from the domestic market.

However, the implication of the 2023 deficit financing structure at the backdrop of the massive depreciation of the local currency was a far higher cost of borrowing in both 2023 and 2024.

The 2024 budget is already top heavy on loan servicing, while debt service to revenue ratio deteriorated further in 2023 into 2024.

Financial analysts said though the higher budget figure for 2024 may have been buoyed by the expected higher Naira revenue from foreign exchange sales, the gains would be lost to foreign debt servicing.
Giving insight into the situation, analysts at the Lagos based investment house, CardinalStone Finance, noting that deficit financing is expected largely from the domestic market at N6.0 trillion of total deficit of N9.05 trillion, stated: “The plan to increase domestic debt sourcing appears consistent with our projections of further weakness in the naira, which may bloat the cost of external debt financing”.

But the expected foreign exchange translation gain for the FG’s revenue may also face more challenges as further depreciation of the Naira with uncertainties around oil production and earnings will force the government to overshoot the already high debt service budget for 2024.

According to the analysts at CardinalStone Finance, “the government could profit from positive FX translation following the over 40.0% currency devaluation in 2023 and likely further weakness in 2024.
“However, despite likely inflows of a $3.0 billion Afrexim Bank loan and a $1.5 billion facility from the World Bank, the dollar could trade at N850.0/$ at the official window by 2024-year end. Nevertheless, we are worried that unless the government shows more resolve in curbing oil theft, the proposed 2024 oil inflows could be lower, similar to the trajectory seen in 2023”.

Other institutional analysts at Meristem Finance, expressing discomfort with the revenue projections against the backdrop of forex and oil revenue challenges, stated: “The main assumptions underlining the budget are – an oil price of $73.96/bl, an exchange rate of N700.00/USD and oil production of 1.78mbpd.
“While we note that oil production volume has been increasing, obtaining the projected 1.78mbpd requires increased efforts to curb theft and increase investment in the sector.

“Also, we anticipate a further depreciation in the Naira, potentially below the assumed levels premised on the limited supply of FX”.

To address the FX illiquidity and ensure economic stability, the finance minister disclosed FG’s intention to approach the World Bank for an extended credit facility of $1.50 billion. In our view, the approval and receipt of this fund will be crucial to provide respite.

Yet another investment house, Afrinvest West Africa, expressing their doubts over the fiscal plan in the three-year MTEF, stated: “Looking forward, the  fiscal authority estimates that the Nigeria economy will expand by 3.8%, 4.2% and 4.8% within the period of 2023-2026 sequentially. This is placed on average crude oil production sitting at 1.8mbpd and oil price of $72.54bbl.

“On the other hand, the average inflation and exchange rate are estimated at 20.1% and N678.47/$ respectively.

“In our view these assumptions seem flawed considering the play of dynamics both in the global and domestic front.

“0n the global front downside from geopolitical tensions and slowing global growth on global oil demand, alongside continued rates hike are expected to negatively impact on oil price and capital inflows into Nigeria economy.

“Likewise the steep depreciation of the Naira (down 41.0% and 36.3% this year in the NAFEM and parallel market respectively) caused by demand-supply imbalance, declining foreign capital inflows, weak oil production due to industrial-scale theft and infrastructure deficit further dents the plausible actualization of these assumptions”.