The Federal Government’s domestic borrowing has surged by 117% to N20.1 trillion in the first year of President Tinubu’s administration, sparking concerns over its impact on inflation, interest rates, and the private sector. Analysts warn that the sharp increase in borrowing could compound the historic high inflationary trend, lead to further interest rate hikes, and make it costlier for businesses to borrow.
According to data from the Debt Management Office (DMO) and the Central Bank of Nigeria (CBN), the FG borrowed N20.09 trillion through various instruments, including FGN Bonds, FGN Savings Bonds, Sukuk Bonds, and Nigeria Treasury Bills (NTBs), in the 12 months ending May 31st, 2024. This represents a significant increase from the N9.275 trillion borrowed in the previous 12 months.
Most of the increase in borrowing was through NTBs auctions conducted by the CBN, which accounted for 66% of FG’s domestic borrowing during the period. FG’s borrowing through FGN Bond auctions rose by 42% to N6.476 trillion, while borrowing through Sukuk Bonds and FGN Savings Bonds also increased by 169% and 116%, respectively.
Analysts note that the high interest rate regime, driven by the CBN’s hike in the Monetary Policy Rate (MPR), has made government securities more attractive, leading to increased participation and higher borrowing costs for businesses. The average MPR rose to 20.32% in the 12 months ending May 2024, representing a 4.11 percentage point increase from the previous year.
While some analysts argue that the increased borrowing will drive demand for goods and services, leading to higher inflation, others believe that the higher interest rates will reduce money circulation, limiting inflationary pressure. However, there is a consensus that the borrowing spree will make it costlier for businesses to borrow and may lead to further interest rate hikes.
The FG’s domestic borrowing has also raised concerns over fiscal policy, with analysts calling for more efficient use of borrowed funds and increased production output in the economy. The government’s debt service costs are also expected to rise significantly, factoring in the higher rates and increase in domestic borrowing.”