FGN converts CBN loans into marketable securities as debt soars

Friday, Jan 15, 2021 / 12:44 p.m. / by FDC Ltd / Header image credit: MIES Group


The Federal Government has revealed its intention to convert its 2020 CBN loans (on N11trn) into formal loans by designing “special instruments” that could be repackaged and sold as bonds. The FG had partially financed the N6.1trn deficit for 2020 through “ways and means” and should also do so again in 2021.

The impact of this will be a huge injection of more than N11trn into the fixed income market in 2021, which would lead to higher fixed income yields. This supports the expectation of a shift to a higher interest rate environment in 2021. It could also have negative consequences on stock market liquidity which has been one of the main beneficiaries of the lack of fixed income securities. .

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

This is after securing unconditional multilateral financing from the IMF ($ 3.4 billion) in 2020. A larger budget deficit of 5.7 billion naira is forecast in the 2021 budget – 14.46% higher than the deficit of 6.91 billion naira in 2020. conclusion of negotiations with the World Bank on the loan of 1.5 billion dollars, which will make it possible to close the budget deficit. The government’s decision not to give in to the naira float also limits its ability to access significant financing from concessional loans from the World Bank.

However, he now emphasizes domestic borrowing over external debt and said there would be no Eurobond at current interest rates. In 2020, Vice President Yemi Osinbajo hinted at the federal government’s intentions to extend what is now a two-year hiatus in the Eurobond market. This is despite low interest rates around the world, as central banks in advanced economies have reduced benchmark interest rates to near zero to boost their economies in the wake of the negative effects of the COVID-19 pandemic.

The federal government’s move will ease pressure on growing foreign debt and exchange rate volatility. Domestic debt issuance will rise accordingly, crowding out private sector borrowing. With soaring inflation, a shift to a higher interest rate environment is now almost inevitable in the short term, exacerbating financial pressures from governments as the cost of servicing domestic debt rises.

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Proshare Nigeria Pvt.  Ltd.
Proshare Nigeria Pvt.  Ltd.
Proshare Nigeria Pvt.  Ltd.

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