As President Bola Tinubu readies the 2025 national budget, which significantly depends on borrowed funds, the Federal Government is expected to surpass its 2024 domestic borrowing target by N4 trillion, equating to about 67 percent over the planned amount.
These developments come despite growing concerns about the persistent increase in the nation’s debt stock. Data on the government’s domestic borrowing activities for the 11 months leading up to November 2024 indicate that borrowing has exceeded N2.93 trillion, which is 49 percent higher than the targeted amount as of November.
Findings from Financial Vanguard revealed that the Federal Government borrowed N8.93 trillion from domestic investors between January and November 2024, significantly surpassing the annual target of N6 trillion. If this trend continues, the government could end up borrowing N10 trillion in 2024, which is 67 percent above the planned amount.
In the meantime, these developments occur alongside the government’s intention to finance the 2025 budget deficit with domestic and external borrowings totaling N9.22 trillion, an 18% increase from the N7.808 trillion allocated for 2024.
According to a report from the Federal Ministry of Budget and Economic Planning, the 2025 deficit budget will be funded through new foreign and domestic borrowings of N9.22 trillion, N312.33 billion from privatization proceeds, and N3.55 trillion from existing multilateral/bilateral project-tied loans. Domestic borrowings are expected to make up the bulk of the deficit financing due to limited opportunities for external funding.
In the third quarter of 2024, the Federal Government of Nigeria borrowed a total of N2.134 trillion from domestic investors, with N1.181 trillion obtained through Nigeria Treasury Bills (NTBs), N939.246 billion from FGN Bonds, and N14 billion from FGN Savings Bonds. Additionally, during October and November, the government borrowed N774.953 billion through NTBs, N635.752 billion via FGN Savings Bonds, and N7.152 billion from FGN Savings Bonds.
According to recent data from the Debt Management Office (DMO), the Federal Government’s domestic debt stock for the first half of 2024 (H1’24) reached N66.957 trillion, marking a 38.6% increase from N48.314 trillion in H1’23.
Borrowings by the Central Bank of Nigeria (CBN) through Nigeria Treasury Bills (NTBs) climbed to N11.8 trillion in H1’24, up from N4.7 trillion in H1’23, representing 17.64% of the Federal Government’s total borrowing. In addition, the Government’s borrowing via monthly FGN Bond auctions, which represented 78.13% of total borrowing during this period, increased from N41.722 trillion in H1’23 to N52.315 trillion in H1’24.
Borrowing through Sukuk Bonds, which accounted for 1.6% of total domestic borrowing, rose from N742 billion in H1’23 to N1.092 trillion in H1’24.
Domestic borrowing by the Federal Government through FGN Savings Bonds increased to N55.196 billion in H1’24, accounting for 0.08% of total borrowing, up from N30.704 billion in H1’23.
Analysts attribute the 49% increase in domestic borrowing in the first eleven months of 2024 to investors responding to the high interest rate environment, driven by a cumulative 875 basis points hike in the Central Bank of Nigeria’s Monetary Policy Rate (MPR), which rose from 18.75% in February to 27.5% by November.
Consequently, the interest rate on 364-day NTBs climbed to 22.93% in November from 12% at the start of the year. Similarly, the average interest rate on 2-year FGN Savings Bonds increased to 17.483% in December 2024 from 12.287% a year earlier.
David Adonri, Analyst and Executive Vice Chairman at Highcap Securities Limited, examined the fiscal situation in 2024, noting that rising debt and yields have mixed implications for various economic players. While investors benefit from increased debt yields, corporate debt issuers face higher borrowing costs and a crowding-out effect due to government borrowing.
He warned that growing public debt, indicative of an expansionary fiscal policy, undermines the effectiveness of tightened monetary policy. The Federal Government is trapped in a cycle of borrowing to service existing debts, which limits funds available for economic development and raises the risk of a sovereign default if excessive borrowing continues.
Furthermore, the high interest rates hinder private sector borrowing, leading to inflation as businesses increase prices to cope with elevated borrowing costs. Adonri anticipates ongoing pressure from the government on the Central Bank of Nigeria as debt service costs rise, cautioning that sustained high levels of government borrowing are unsustainable and contribute to currency devaluation due to excess Naira in circulation.
In discussing the government’s fiscal policy, David Adonri noted that the impact of government borrowing has yet to enhance fiscal policy efficacy beyond infrastructure projects like coastal roads. He emphasized the need for more initiatives aimed at boosting production output and anticipated significant increases in debt servicing costs due to higher interest rates and escalating domestic borrowing.
Victor Chiazor, Head of Research and Investment at Fidelity Securities Limited, echoed these concerns, stating that government borrowing has contributed to inflation and negatively affected exchange rates, while also crowding out private sector lending, making borrowing unaffordable for many businesses. He suggested that the monetary policy response may involve continued interest rate hikes to combat rising inflation.
Dr. Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, underscored the necessity of moderating government borrowing to prevent overheating the economy.
The implications of deficit financing on inflation depend largely on how the deficit is funded. If the Central Bank of Nigeria (CBN) prints money to cover the deficit, it can lead to significant inflation because this creates “high-powered money.” However, if the deficit is financed through the issuance of bonds or treasury bills, it is less likely to be inflationary.
An ongoing increase in debt levels can negatively impact the private sector by crowding out credit, as more loans may go to the government rather than businesses. This trend should be a concern, as it risks diminishing private sector growth.
In terms of fiscal policy, borrowing is a tool used to address budget gaps. It is crucial to maintain sustainable borrowing ratios, including the debt service-to-revenue and debt-to-GDP ratios, to ensure economic stability.
Olatunde Amolegbe, former President of the Chartered Institute of Stockbrokers, stated that borrowing is a natural aspect of public expenditure for a country’s growth, but the purpose of the debt is crucial. He expressed concern over borrowing for recurrent expenditure and advocates for project-specific debt that can effectively boost economic development.
While acknowledging high borrowing levels and costs, he believes debt sustainability is manageable as long as debt-to-GDP and debt-to-revenue ratios remain stable or decline. Amolegbe pointed out that the recent increase in federal government borrowing is likely driven by attractive interest rates for investors, offering around 18% returns on investments as low as N10,000, which supports wealth distribution and empowerment.
Ultimately, he emphasized that the effectiveness of borrowing lies in how funds are utilized to enhance production, highlighting the private sector’s need for infrastructure to lower production costs.
Tajudeen Olayinka, an investment banker and stockbroker, highlighted the importance of debt sustainability for Nigeria, emphasizing the need to monitor key ratios: debt-to-GDP, debt-to-revenue, and debt-to-export. He argued that more sustainable debt reduces economic burdens and that Nigeria needs to enhance productivity to support its current debt levels, especially given the unsustainable debt service-to-revenue ratio inherited from the previous administration.
Olayinka warned that large U.S. dollar-denominated debts could pose greater risks than substantial Naira debts. He urged the government to manage debt within a sustainability framework. Though he noted growth in savings bonds from 2023 to 2024 was not alarming, he pointed out that this market segment was underperforming.
In the 2024 budget, the federal government estimated total expenditures at N27.50 trillion and revenues at N18.32 trillion, resulting in a fiscal deficit of N9.05 trillion.
The federal government plans to finance the projected fiscal deficit of N9.05 trillion through a mix of funding sources, including N6.04 trillion from domestic borrowings, N1.77 trillion from foreign borrowings, N941.19 billion from multilateral and bilateral loan drawdowns, and N298.49 billion from privatization proceeds.