The Federal government has revealed plans to convert its loans from the CBN in 2020 (over N11trn) into formal borrowings by designing "special instruments" that could be repackaged and sold as bonds. The FG had partly financed the N6.1trn deficit for 2020 by "Ways and Means" and is also likely to do so again in 2021.
The impact of this is will be a huge injection of over N11trn into the fixed income market in 2021 which would trigger a rise in fixed income yields. This supports the forecast of a shift to a higher interest rate environment in 2021. This could also have negative consequences for liquidity in the equities markets which has been one of the biggest beneficiaries of the lack of fixed income securities.
The Federal government, will also increase its total borrowings, now at $73.57bn, but will not take any new facilities from the International Monetary Fund (IMF). The Federal Minister of Finance disclosed this.
This is after it obtained nonconditional multilateral financing from the IMF ($3.4bn) in 2020. A higher fiscal deficit of N5.7trn is projected in the 2021 budget - 14.46% higher than the deficit of N6.91trn in 2020. The government is also concluding negotiations with the World Bank on the $1.5bn loan, which will provide support in bridging the fiscal gap. The government's decision to not give in to floating the naira is also limiting its ability to access significant funding from concessionary loans from the World Bank.
However, it is now emphasizing on domestic borrowing above external debt and has stated that there would be no Eurobond at current rates of interest. In 2020, Vice President Yemi Osinbajo had hinted at the Federal government's intentions to extend what is now a two-year hiatus from the Eurobond market. This is in spite of low interest rates globally, as central banks in advanced economies have reduced benchmark interest rates to nearzero to stimulate their economies in the wake of the negative effects of the COVID-19 pandemic.
The Federal government's decision will ease the pressure on mounting external debt and exchange rate volatility. Domestic debt issuances will increase as a result, crowding out private sector borrowing. With inflation skyrocketing, the switch to a higher interest rate environment is now almost inevitable in the near term and this will exacerbate the governments financing pressures as the cost of servicing domestic debt would rise.