Abuja, Nigeria – November 15, 2024 – The Nigerian government has unveiled plans to raise approximately $2.2 billion in international capital markets to finance the 2024 budget deficit. This will be achieved through the issuance of Eurobonds and Islamic Sukuk bonds.
Breakdown of the Financing Plan
The financing package comprises:
- $1.7 billion via the issuance of Eurobonds, a traditional debt instrument used by sovereign governments to raise capital in international markets.
- $500 million through the issuance of Sukuk bonds, a Sharia-compliant instrument that aligns with Islamic finance principles.
These steps are aimed at addressing the revenue shortfalls in the 2024 budget, which is pegged at N28.7 trillion (approximately $17 billion). The budget includes a projected deficit of N9.1 trillion (about $5.2 billion), which will primarily be covered through borrowing.
The Need for External Borrowing
While Nigeria has traditionally focused on domestic borrowing—through instruments like Treasury Bills (T-Bills) and Federal Government Bonds—the growing fiscal gap and low domestic revenue from sources like oil have led to an urgent need for external debt. The country’s external debt currently stands at approximately $42.9 billion, representing about 39% of Nigeria’s total debt stock.
The approval for Eurobond issuance is part of the 2024 Appropriation Act, and Minister of Finance Wale Edun confirmed that the government is actively preparing to submit the borrowing plan to the National Assembly for approval before the end of the year.
Key Considerations
- Debt Composition and Risks:
- The issuance of foreign currency-denominated debt, such as Eurobonds and Sukuk, introduces the risk of higher debt servicing costs due to exchange rate fluctuations and interest rates. The naira’s devaluation adds another layer of challenge in managing this debt, making the cost of servicing external loans more expensive.
- Additionally, foreign-denominated debt comes with the inherent risk of increased vulnerability to shifts in global financial markets, particularly in the context of rising interest rates globally.
- IMF Concerns:
- The International Monetary Fund (IMF) has raised concerns over Nigeria’s growing reliance on dollar-denominated bonds. The IMF warned that such a strategy could put additional pressure on the naira, further eroding its value against the dollar and increasing the cost of servicing naira-based debt.
- There are also concerns that introducing new foreign exchange securities—intended to improve dollar liquidity in the official market—could lead to market fragmentation and volatility.
- Domestic Debt Surge:
- Nigeria’s domestic debt has surged to N66.9 trillion as of the second quarter of 2024, representing about 60% of the total debt stock. The shift towards external borrowing, with a focus on Eurobonds and Sukuk, signals an effort to manage this rising debt load while diversifying financing options.
- Revenue Shortfalls:
- The pressing need for external debt arises from revenue shortfalls, which have been exacerbated by low crude oil production and the country’s ongoing economic challenges. The government’s fiscal strategy now includes Eurobonds as a critical tool for raising capital and addressing the N9.1 trillion budget deficit.
Impact on Nigeria’s Fiscal Outlook
The success of this borrowing strategy will depend on global market conditions and investor sentiment. Nigeria’s macroeconomic policies and fiscal management, under the leadership of President Bola Tinubu, will be key in maintaining confidence among international investors.
Additionally, the new Sukuk bonds could attract investments from Islamic financial institutions, helping to broaden the country’s investor base.
Nigeria’s decision to issue Eurobonds and Sukuk bonds is a critical step in addressing the country’s fiscal challenges and meeting the funding gap in the 2024 budget. However, the country will need to carefully manage the risks associated with external borrowing, particularly the implications for the naira and the cost of debt servicing in a challenging global economic environment. The approval of this borrowing plan by the National Assembly will be crucial in determining Nigeria’s ability to meet its economic recovery goals and stabilize public finances in the coming year.
