The Federal Government of Nigeria has borrowed N20.1 trillion from domestic investors in the first year of President Bola Tinubu’s administration, marking a 117% year-on-year increase from the previous year. This significant rise in borrowing has raised concerns about potential economic impacts, including inflationary pressure, increased debt servicing costs, and higher borrowing costs for businesses.
Analysts warn that the sharp increase in government borrowing could exacerbate Nigeria’s already high inflation, potentially prompting further interest rate hikes by the Central Bank of Nigeria (CBN). Such hikes would likely increase borrowing costs for both businesses and individuals.
The Federal Government raises funds from domestic investors through instruments issued by the Debt Management Office (DMO), including FGN Bonds, FGN Savings Bonds, and Sukuk Bonds, as well as Nigeria Treasury Bills (NTBs) issued by the CBN.
According to Financial Vanguard’s analysis of DMO and CBN data, from June 2023 to May 2024, the Federal Government borrowed N20.09 trillion, up from N9.275 trillion in the preceding 12 months. The bulk of this increase came from NTBs, which constituted 66% of the government’s domestic borrowing during this period.
### Breakdown of Borrowing:
– **NTBs**: Borrowing rose by 188% to N13.235 trillion from N4.592 trillion.
– **FGN Bonds**: Borrowing increased by 42% to N6.476 trillion from N4.537 trillion.
– **Sukuk Bonds**: Borrowing surged by 169% to N350 billion from N130 billion.
– **FGN Savings Bonds**: Borrowing grew by 116% to N29.17 billion from N16.07 billion.
### Interest Rate Hike Impact
The rise in borrowing coincided with an increase in the Monetary Policy Rate (MPR) by the CBN, which averaged 20.32% in the 12 months ending May 2024, up from 16.21% in the previous 12 months. Consequently, the average interest rate on NTBs increased to 9.1%, while FGN Savings Bonds saw rates rise to 17.91% at the May 2024 auction from 10.89% a year earlier.
### Analysts’ Comments
**Nnamdi Nwizu**, Co-Founding Partner at Comercio Partners, expressed concerns about government spending driving inflation and crowding out the private sector in the credit market. He noted that higher borrowing rates would make it difficult for businesses to remain profitable and could lead to increased prices to cover borrowing costs.
**Tunde Abidoye**, Head of Equity Research at FBN Securities Limited, echoed these concerns, warning that government borrowing could fuel inflationary pressures and impact exchange rates, making it costlier for businesses to borrow.
**Chinazom Izuorah**, Senior Associate at Investment Brokerage, acknowledged that higher interest rates on government securities attract more participation but argued that this is consistent with the CBN’s objective of reducing inflation by mopping up liquidity. She noted that higher rates incentivize saving, reducing money in circulation and helping to control inflation.
**Dr. Muda Yusuf**, CEO of the Centre for the Promotion of Private Enterprise (CPPE), emphasized the need to moderate borrowing to avoid overheating the economy. He pointed out that borrowing through bonds and treasury bills is less inflationary than financing deficits by printing money but cautioned against the risks of increasing domestic debt.
The sharp rise in domestic borrowing by the Federal Government underlines the complex interplay between fiscal policy, monetary policy, and economic stability, with significant implications for inflation, interest rates, and private sector growth.
