The Nigerian government will look beyond Eurobonds because of the cost of servicing them and seek cheaper funds to fund government expenditure and boost growth as the country’s economy teeters on the brink of recession.
“We are not likely going to explore again the Eurobond market because we are trying to avoid commercial borrowing,” Nigeria’s Vice President, Yemi Osinbajo told newsmen in an interview.
Growth in Africa’s biggest economy slowed by 6.10% in the second quarter as a result of the impact of the new coronavirus pandemic. If anticipated Nigerian Bureau of Statistics figures for the third quarter show that economic output once again shrank in Q3 2020, Nigeria would enter its second recession in four years.
The technical definition of a recession is a decline in economic output in two consecutive quarters.
The International Monetary Fund forecast in June the country’s gross domestic product would shrink 5.4% this year.
Nigeria’s economy is taking a hammering from the coronavirus crisis, which in April sparked a crash in oil prices, Nigeria’s number one export, and an exit of foreign investors in their numbers. Apart from the government having less to spend, economic activities have also declined due to the restrictions on movement put in place to control the spread of the novel coronavirus. Poor policy choices is perhaps the most important barrier to growth.
Last Thursday, government presented an historic N13.08 trillion 2021 budget to legislators seeking to boost growth with increased government spending.
Mr. Osinbajo told journalists that Nigeria is hoping to obtain loans from the World Bank instead of issuing new Eurobonds. The multilateral lender has delayed granting Nigeria a $1.5 billion budget support facility on the grounds that the country is yet to embrace a consolidated, flexible exchange rate that narrows the gap between official and parallel market naira rates.
Nigeria’s 2021 budget proposal envisages a N4.65 trillion fiscal deficit. Nigeria faced a similarly serious but less severe domestic revenue gap and external financing constraint i.e. having insufficient foreign exchange to pay for imports and service debts, in 2014 as a result of the fall in the price of oil.
The administration of President Mohammadu Buhari in 2015 opted for commercial debt, issuing Eurobonds i.e. raising funds from private investors (in international capital markets) to fund the gap between revenue and planned expenditure i.e. the budget deficit and the external financing gap. (Eurobonds simply means bonds a country sells (or money it borrows) outside its country and in a currency other than its own currency.)
The government made this choice though the interest rates on commercial debts are much higher than the rate on loans from multilateral development institutions like the International Monetary Fund and the World Bank to avoid the conditions i.e. demands for economic policy reforms, the institutions normally attach to their loans.
The International Monetary Fund had frequently warned countries like Nigeria about the unsustainability of taking on high interest commercial debts which allow them to use their own funds more freely, in Nigeria’s case to fund subsidies for fuel, electricity and foreign exchange. Higher-cost commercial debt has no policy strings attached.
Nigeria has come to a point where it can no longer issue Eurobonds i.e. raise new commercial debts. The country now devotes more than 90% of its revenue to paying interest on existing debt, a debt service to revenue ratio that is approaching debt distress.
Should Nigeria decide to issue another Eurobond, the interest rate will be extremely high given the evident risk that the country may default i.e. find it impossible to service the debt given the high burden of servicing existing debt. Nigeria had to abandon plans to issue a $3.1 billion Eurobond in March 2020 as the new coronavirus spread and debt markets started to price in the risk of default.
Nigeria has been left with little option but to seek loans from the World Bank and try and meet the attached conditions.
“All of us agreed that we must close the arbitrary gap but this is the function of the central bank,” Mr Osinbajo said.
Even casual watchers of the Nigerian economy would disagree with the Vice President’s insinuation that the Central Bank of Nigeria independently has chosen to maintain the “arbitrary gap” between the exchange rate in the CBN-regulated market and the street value of the naira.
It is common knowledge that President Mohammadu Buhari adamantly has opposed devaluation of the naira, once pronouncing that he does not want the national currency “murdered”. While Mr. Osinbajo’s position is in principle correct because the CBN has legal independence to manage policies that determine the value of the naira in a way it deems encourages investment and stimulates economic growth, in reality the CBN under Mr. Godwin Emefiele has surrendered completely this independence to the Nigerian President, more overtly than previous CBN Governors.
The result has been that the CBN has done too little too late, rigidly maintaining the exchange rate long after the price of oil has fallen, thus running down its reserves as it seeks to supply foreign currency at an unviable rate given the reduced inflow of dollars.
The significant gap between the “official” rate and the parallel market rate, now around N78 for a single dollar, has meant that the CBN unwittingly is funding the so-called black market through people who are able to buy foreign currency at the official rate and sell at a markup in the parallel market.
Nigeria has taken action on other conditions of the World Bank loan such as scrapping the fuel subsidy and allowing electricity companies to charge prices that cover the cost they incur in producing and supplying power, the so-called cost reflective tariffs.
Moving to a flexible exchange rate market that eliminates the gap between the CBN rate and the parallel market has remained a sticking point.