Nigerian government borrowing costs on local bonds have jumped to a five-year high, adding pressure to a debt service burden that consumes more than two-thirds of revenue in Africa’s biggest economy.
Average yields for local-currency denominated sovereign bonds have risen to 14.84 percent as of Thursday from 11.79 percent in May, the month the Central Bank of Nigeria (CBN) started hiking its benchmark interest rate to curb accelerating inflation that hit a 17-year high in October.
The CBN has lifted rates by 500 basis points since May to 16.5 percent, boosting interest rates on government debt paper.
The government last week sold N199 billion worth of 364-day bills at a yield of 14.84 percent, the highest since February 2019. While the bills were oversubscribed, the debt office only alloted about half the amount it planned to sell, pushing back on the higher yields demanded by investors.
While interest rates have jumped they still lag inflation at 21.1 percent, a discrepancy the central bank says it plans to correct by raising rates until the gap is closed.
The risk of having negative real interest rates is that it discourages investment in the domestic market, the director in the monetary policy department at the central bank, Hassan Mahmud said.
“We need to sanitize the market so that government can also in the future have a domestic source where it can raise the funds,” he said.
Bids at government debt auctions are already faltering due to the lower-than-inflation yields on offer. The subscription rate for a 14.5 percnt bond due in 2029 was 9.8 percent of the N75 billion debt offered in October, the lowest since December 2018.
The weak appetite for short-tenured debt forced the Debt Management Office (DMO) to make more allotments in the longer-dated 15 to 20-year issuances, where investors sought more than the government was willing to sell — but at higher yields.
The DMO sold the bond due in 2037 at 16.2 percent, the highest yield since August 2017. That raises the pressure on the government’s debt service costs even further.
As of August, debt service consumed 84 percent of revenues and the World Bank projects it could rise to 169 percent of income by 2025 if the government fails to implement fiscal reforms.
The central bank is concerned about how inflation is shrinking disposable income but doesn’t plan to ease policy until it sees inflation declining to around 12 percent-15 percent, Mahmud said.
“So long as inflation is going up, the real value of income is also eroded,” he said.
The West African nation has ruled out selling bonds on international debt markets this year after it shelved a proposal to raise about $950 million in May, citing unfavorable market conditions after Russia’s invasion on Ukraine.
“I think this would be an opportunity for also the government to find other alternative channels of raising funds,” Mahmud said.