The Federal Government of Nigeria rolled out its 2012 borrowing train last week issuing three different bonds with different maturities. The interest rates on the bonds were the highest the Federal Government has paid since 2003 when it started issuing bonds again in the Nigerian market.
Goodluck Jonathan, Nigeria's President.
Figures from the Debt Management Office (DMO), the Office in charge of issuing local bonds, shows that the Nigerian government raised a total of N89.76 billion last week Wednesday in three different tranches. This was the government’s first debt auction this year. The interest rate the government had to pay on all the bonds were higher than all bonds previously issued by the government, an indication that the cost of borrowing money from Nigerians by the Nigerian government has gone up.
The Federal government issued a fresh 10 year N35 billion bond due to mature in 2022 with the interest rate on the bond hitting a new high of 16.39 per cent. What this simply means is that the Federal government will be paying an average of N5.74 billion on this loan as interest for the next ten years. In ten years, the interest the government would have paid on this loan will be about N57 billion. In effect, for borrowing N35 billion today, the government will have to pay N57 billion in total interest payments for the next ten years and still pay back the N35 billion at the end of the 10th year. The government will have to pay a total N92 billion in the next ten years for borrowing N35 billion today.
For the total of N89.7 billion bond issued by the Federal government last week at an average interest rate of 17 per cent, the Nigerian government will have to pay an average of N15 billion on a yearly basis on this debt for the next ten years. This will amount to about N150 billion in interest payments only on the original N89.7 billion borrowing. At the end of the tenth year, the government would have to pay back the N89.7 billion to the bond holders. In other words, for borrowing N89.7 billion today, the government has effectively created a future cumulative debt obligation of approximately N240 billion over the next ten years.
Ngozi Okonjo-Iweala, Nigeria's Minister for Finance
The picture will become scarier if you realize that the Nigerian government has just started its borrowing spree for 2012. Based on the 2012 budget, which is still before the house of assembly, the total amount the federal government is likely to borrow this year will be about N1.11 trillion. This is the difference between the revenues available for the government to spend in 2012 and its planned expenditure. If the government were to borrow the whole N1.11 trillion through the issue of bonds to Nigerians at the same interest rate it just issued last week’s bond and for the same ten year period, then the government will have to pay holders of those bonds an average of N160 billion on a yearly basis for a period of ten years. This will mean that the government will pay an average of N1.6 trillion in interest payments alone over the next ten years in addition to repaying the N1.1 trillion debts back to the bond holders in the tenth year.
So if the Federal Government goes ahead to borrow the whole N1.1 trillion through bonds this year, it would have created a financial obligation of about N2.7 trillion which it has settle in the next ten years. The N2.7 trillion interest payments may even go higher if interest rates go up further. The Central Bank of Nigeria (CBN) is already saying that it expects that interest rates will go up further this year. This will mean the cost of government borrowing will also go up further raising the amount of money the government will pay as interest rates on the money it borrows from Nigerians.
Signs are that if the Nigerian government continues borrowing at this pace, it may soon be spending a good chunk of its revenues paying down its debts. The 2012 budget shows that the Federal government will pay N511 billion as interest rates on its existing domestic debts of N5.32 trillion this year. This is about 14 per cent of the Federal government’s projected revenues for 2012. It also represents about 39 per cent of the government planned expenditure on capital projects.
Assuming the Nigerian government decide today to pay down only the interest on its debts in the next ten years, without paying down the principal and without taking on additional new debts in the next ten years, at the end of the tenth year, that is in 2022, the Nigerian government would have paid a total of about N5.11 trillion in interest payments alone, almost equivalent of its domestic debts of N5.32 trillion and still owe the N5.32 trillion.
However, with the Federal government still showing a healthy appetite to borrow the scenario looks even scarier. Assuming the Federal government goes ahead to borrow, the total of N1.1 trillion from Nigerians this year, the total domestic debt of the Federal government will rise to about N6.4 trillion by the end of 2012. The interest payment obligations of the FGN on this debt will average about N671 billion at the minimum with a good chance of it hitting a trillion naira.
What should also really worry Nigerians is what the Federal government is doing with the money and the impact the government’s huge appetite for domestic debts is having on the economy. From 2003 to date, the Federal Government has borrowed more than N4 trillion through the issuance of bonds with a more than 70 per cent of the issuance taking place from 2008 to 2011.
Interestingly, the period 2008 to 2011 has also seen a significant expansion in the government recurrent expenditure which shows that a good chunk of the money borrowed from 2008 to 2011 has just gone into sustaining the huge bureaucracy of governance. For example, the government recurrent expenditure currently stands at about 72 per cent of its 2012 budget down from 74 per cent of the 2011 budget.
The recurrent expenditure is mainly made up of salaries and wages of government workers, political functionaries and the cost of running government’s huge bureaucracy. Part of the recurrent expenditure is also what goes into sustaining the huge salaries of the national assembly members and the many many special assistants and quasi special assistant hanging around government.
The implication of this current borrowing pattern is that though the government is borrowing heavily, it is not spending the borrowed funds productively. So someday, not too far way, Nigerians will wake up owing a lot of money and wondering what was achieved with the huge funds.