Nigeria: High Cost of Borrowing - Govt Targets Domestic Market to Fund N9.05trn Budget Deficit

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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.

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. 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".

"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".

"Also, we anticipate a further depreciation in the Naira, potentially below the assumed levels premised on the limited supply of FX". "On the other hand, the average inflation and exchange rate are estimated at 20.1% and N678.47/$ respectively.

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