FGN to convert CBN loans to tradable securities as debt soars

Stories by Chima Nwokoji

| Lagos


THE Federal government has revealed plans to convert its loans from the Central Bank of Nigeria (CBN) in 2020 totaling over N11 trillion into formal borrowings by designing “special instruments” that could be repackaged and sold as bonds.

Financial Derivatives Company (FDC) which disclosed this in its January Economic Bulletin stated that the FG had partly financed the N6.1 trillion deficit for 2020 by “ways and means” and is also likely to do so again in 2021.

The impact of this, according to FDC, is that it will be a huge injection into the fixed income market in 2021 which would trigger a rise in fixed income yields. This supports the forecast of a shift to a higher interest rate environment in 2021.

It further noted that this could also have negative consequences for liquidity in the equities markets which has been one of the biggest beneficiaries of the lack of fixed income securities.

The federal government will also increase its total borrowings, now at $73.57 billion, but will not take any new facilities from the International Monetary Fund (IMF). The Minister of Finance disclosed this.

This is after it obtained unconditional multilateral financing from the IMF ($3.4 billion) in 2020.

According to FDC, a higher fiscal deficit of N5.7 trillion is projected in the 2021 budget – 14.46 per cent higher than the deficit of N6.91 trillion in 2020, even as the government is also concluding negotiations with the World Bank on the $1.5 billion loan, which will provide support in bridging the fiscal gap.

However, the FG is now emphasizing on domestic borrowing above external debt and has stated that there would be no Eurobond at current rates of interest. In 2020, Vice President Yemi Osinbajo had hinted at the federal government’s intentions to extend what is now a two-year hiatus from the Eurobond market.

“This is in spite of low interest rates globally, as central banks in advanced economies have reduced benchmark interest rates to near zero to stimulate their economies in the wake of the negative effects of the COVID-19 pandemic.

“The Federal government’s decision will ease the pressure on mounting external debt and exchange rate volatility. Domestic debt issuances will increase as a result, crowding out private sector borrowing. With inflation skyrocketing, the switch to a higher interest rate environment is now almost inevitable in the near term and this will exacerbate the governments financing pressures as the cost of servicing domestic debt would rise,” the firm stated.


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