Assessing Nigeria’s external borrowing plan: Nigeria’s money market

Nigeria's President, Muhammadu Buhari, has resubmitted the 2016-2018 external borrowing plan to the National Assembly for consideration and approval. The plan seeks approval to borrow a staggering $29.96 billion, with the aim of raising the country's debt profile from $80 billion to approximately $113 billion. Despite the economic rationale behind this move, there has been pushback from legislators due to the lack of a detailed breakdown on how these funds will be allocated. Bankole Odusanya, Head of Fixed Income Trading at United Bank for Africa (UBA), shed light on the complexities of Nigeria's borrowing plan and the prevailing market conditions. With Nigeria's debt currently standing at $80 billion, the proposed expansion has sparked a debate between the economic benefits and political considerations surrounding the borrowing plan. Odusanya highlighted the low interest rate environment in Nigeria, especially for debt issued by the Ministry of Finance to finance the deficit. While short-term Treasury Bills enjoy low costs, long-term bonds still carry double-digit yields. The rationale behind the President's call to borrow a substantial amount upfront is to invest systematically over time, rather than resorting to fragmented borrowing. This strategic approach aims to mitigate the escalating costs of projects, given Nigeria's inflation rate of 11% and exposure to exchange rate risks for imported materials. However, the lack of transparency regarding project specifics raises concerns about the legitimacy of the borrowing plan. The economic viability of the borrowing plan is juxtaposed with political scrutiny, as legislators demand clarity on the proposed projects and their distribution. The delicate balance between economic growth and political accountability underscores the challenges facing Nigeria's external borrowing strategy. Despite the need for increased debt exposure to fund vital projects, the absence of a comprehensive project blueprint raises apprehensions among stakeholders. Shifting focus to the market dynamics, Odusanya delved into the recent developments in Nigeria's fixed income market. Following regulatory changes by the Central Bank of Nigeria (CBN) and restrictions on market participants, the market witnessed a shift in trading patterns. The dichotomy between Nigerian Treasury Bills and CBN's Open Market Operations (OMO) instruments created a disparity in demand, with NTB securities enjoying high demand at yields ranging from 6 to 8%, while OMO instruments faced limited interest. The real rate of return on short-tenured instruments turned negative amid inflation rates of 11.6%, prompting investors to explore alternative investment avenues. Concerns over diminishing returns have led investors to seek higher-yield investment options, with a keen eye on capital and asset management offerings. Despite the challenges posed by the current low-interest regime, statutory obligations compel certain investors to engage in Treasury Bill purchases, necessitating a strategic investment approach. Looking ahead, the market is poised to maintain its dichotomized structure, characterized by low-interest rates on NTB securities and higher yields on OMO instruments, alongside exchange rate stability. As Nigeria navigates the complexities of its borrowing plan and market dynamics, stakeholders are urged to strike a delicate balance between short-term economic gains and long-term sustainability.