Interest rates

FG to Borrow at Higher Cost as Global Interest Rates Rise

AWhile the COVID-19 pandemic was a good thing, global interest rates have been kept at historically low levels for the past two years, as monetary policy authorities around the world have lowered rates. interest in cushioning the impact of the pandemic.

Like many countries in the world, Nigeria had the lowest interest rate since the pandemic and the biggest beneficiary of this COVID stopgap was the federal government, which had borrowed at a very low interest rate.

However, the party seems over as inflationary pressures continue to trigger changes in interest rate policies. The U.S. Federal Reserve has signaled its intention to raise the benchmark interest rate to control inflation, a statement that aligns with calls from the International Monetary Fund (IMF) to central banks of increase interest rates to curb the rise in the prices of consumer products. goods.

The Nigerian government would pay a higher cost for its loans this year and possibly in the medium term, as the interest rate rises in the local market as well. Starting the year with two- and three-year federal government savings bonds, the Bureau of Debt Management announced that it would increase the two- and three-year bonds to 7.542% and 8.542% respectively, a jump significant of 2.197% and 3.197% that he paid. for the same debt notes exactly one year ago in January 2021.

A statement released by the Debt Management Office indicates that the offer was opened for sale of the bonds on January 10, 2022 and would close on January 14, 2022.

The two-year bond matures Jan. 19, 2024, while the three-year bond matures Jan. 19, 2025, the DMO said.

The higher interest rates indicate that the government is expected to pay more for its loans this year, which means that the debt service burden could be exacerbated. The 2022 budget is based on a deficit of 6.4 billion naira, equivalent to 37.4% of the total expenditure of 17.2 billion naira. Interestingly, the government plans to borrow half of the deficit financing from the local market while the rest will be borrowed from the international debt market. Unlike 2021, when the government raised $ 4 billion at yields between 6.8% and 8.25% for 7, 12 and 30 year bonds, the Nigerian government must be prepared to pay higher rates. this year, if he wants to print about $ 6 billion. it intends to increase in the global capital market, as rates have skyrocketed and will continue to rise, so the earlier the government tapped into the market, the better.

With 85% and 76% of revenue spent on debt servicing in 2020 and 2021, the Nigerian government could end up spending a higher percentage of its revenue on interest charges on loans in 2022, especially since the inflated debt profile continues to undermine the government’s prospect of financing infrastructure in the future.