Nigeria’s budget support loan is a fiscal insurance policy and well costed

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Tuesday, February 02, 2016 09:09 AM / FBNQuest Research

The FGN has opened preliminary discussions with the World Bank and the African Development Bank (AfDB) about budget support loans of US$2.5bn and US$1.0bn respectively. We refer to budget support because the loans are intended to cover a potential gap in the FGN’s 2016 proposals although they would be deployed for specific capital projects.

 

 

The authorities have submitted an expansionary budget with an enhanced capital element as their contribution to infrastructure development and growth. This provides a riposte to the argument that they could trim their budget rather than seek this multilateral funding.

 

So as to put the request for budget support into context, we convert the outlines of the proposals into US dollars: a FGN deficit of US$11.1bn, which is to be funded by new domestic and external borrowing of US$4.9bn and US$4.5bn respectively as well as non-debt financing of US$1.7bn.

 

We see the request as an insurance policy to cover an average oil price below the FGN’s assumption of US$38/b, which the National Assembly may look to revise downwards.

 

It also covers what we regard as a greater risk: namely that non-oil revenue collection falls short of the heady projections. The FGN looks to raise US$28.6bn from this source, representing an increase of 133% on the outturn for January-September 2015. The projection of US$7.5bn for FGN independent revenue is particularly ambitious in our view.

 

We do identify one conservative element in the proposals. The forecast of just US$1.7bn for non-debt financing of the deficit (a combination of asset sales, signature bonuses and recoveries) leaves some “wiggle room”.

 

The federal finance minister has pointed out that the approach to the multilaterals has cost advantages. The precise terms would depend on whether they lend to Nigeria as a middle-income country. The rate on the loans would be a fraction of that on a Eurobond (8.3% yield currently for the ‘23s) or a FGN bond of similar tenor (12.0% on the Mar ‘24s).

 

The minister mentioned a non-deal roadshow this month to test appetite for a new Eurobond. This would be a small element of overall financing but a signal that Nigeria is a strong growth story under temporary fiscal pressure. 

 

The FGN has not approached the IMF in these discussions. Nigeria has never entered into a credit arrangement with the Fund and knows well that it incorporates greater conditionality into its agreements than do the World Bank or the AfDB. At end-June the FGN’s borrowings from the two multilaterals totalled US$7.04bn or 68% of its external debt burden. 

 

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