The Federal Government (FG) is shifting its borrowing strategy to focus on the domestic financial market in order to address the challenges posed by the high cost of international borrowing, which has been exacerbated by the significant depreciation of the naira. This change in approach is outlined in the Medium Term Expenditure Framework (MTEF) for 2024-2026, released over the weekend.

For several years, the FG heavily relied on sources such as Eurobond and international institutions like the World Bank and International Monetary Fund to meet its deficit financing needs. However, in the 2023 budget, the FG funded 31.9% of its N11.6 trillion deficit through domestic borrowing, while foreign borrowings covered the remaining 68.1%.

In the recently released MTEF for 2024-2026, the government indicates its intention to source over 66% of the total deficit, which amounts to N9.05 trillion in 2024, from the domestic market.

This adjustment is a response to the unfavorable impact of the depreciation of the local currency, which has resulted in higher borrowing costs for 2023 and 2024. The 2024 budget is already heavily burdened by loan servicing, and the debt service to revenue ratio has worsened.

Financial analysts, such as those at CardinalStone Finance, suggest that increasing domestic debt sourcing is a response to expectations of further naira depreciation, which may inflate the cost of external debt financing.

While the government anticipates foreign exchange gains due to the 40.0% currency devaluation in 2023 and the likelihood of further depreciation in 2024, these gains may be eroded by uncertainties surrounding oil production and earnings, potentially leading to a higher debt service budget for 2024.

Analysts also express concerns about the ability to achieve revenue projections given the challenges posed by foreign exchange and oil revenue. The assumptions underlying the budget, including an oil price of $73.96 per barrel, an exchange rate of N700.00/USD, and oil production of 1.78 million barrels per day, may be difficult to realize without intensified efforts to curb theft and boost investment in the oil sector.

To address foreign exchange liquidity issues and ensure economic stability, the finance minister has disclosed the FG’s intention to seek a $1.50 billion extended credit facility from the World Bank, which is considered crucial for providing relief.

Afrinvest West Africa, among other institutions, expresses skepticism about the fiscal plan outlined in the three-year MTEF, particularly the assumptions related to economic growth, inflation, and exchange rates. They point out that these assumptions may be unrealistic given the complex dynamics at play in both the global and domestic contexts, including geopolitical tensions, slowing global growth, rates hikes, and the depreciation of the naira caused by various factors, including supply and demand imbalances, declining foreign capital inflows, theft of oil, and infrastructure deficits.

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