The federal government has set the terms for the conversion of its stock of Central Bank of Nigeria (CBN) overdrafts into long-term notes in a bid to create transparency around its dependence on that source of funding.

Bloomberg quoted the Director-General of the Debt Management Office (DMO), Ms. Patience Oniha, to have disclosed in an e-mail that the N10 trillion ($25.6 billion) debt will be exchanged for 30-year notes issued to the central bank.

The agreement on timing for the conversion needs to be finalised to get the required approval from the cabinet, at the earliest in the second quarter, Oniha said.

The Nigerian government became dependent on central bank borrowing after oil prices collapsed in 2015.

Earnings from crude sales account for about half of government income in Africa’s largest economy. The financing helped plug spending shortfalls as non-oil revenues failed to cover the gap created by lower earnings from crude exports.

The increasing reliance on CBN overdrafts has negative consequences, the International Monetary Fund had said in a report published last week.
“The financing is costly for the federal government at interest rates of the monetary policy rate plus 300 basis points, and for the CBN, with sterilization done through the issuance of open market operation bills,” the IMF said.

The converted debt will be amortized over 30 years starting with a two-year moratorium when the government will not pay anything, Oniha said.
The central bank will decide whether the securities will be sold to the public.

The conversion will add to Nigeria’s debt stock, which stood at N49 trillion at the end of last year, according to IMF estimates.

Public debt, including the central bank overdrafts, as a proportion of Gross Domestic Product rose to 34.4 per cent in 2020, from 29.1 per cent in 2019, IMF data shows.

The lender forecasts the debt to GDP ratio will remain largely unchanged until 2023 when it will rise to 35.5 per cent of GDP.

Finance Minister, Zainab Ahmed and CBN Governor, Godwin Emefiele, last year agreed to end CBN overdrafts to the government by 2025 in a letter of intent to the IMF before the release of emergency financing.

There will be strict adherence to the statutory limit of the central bank overdraft to the government going forward, which is 5 per cent of the preceding year’s revenue, according to Oniha.

“There is a statutory limit, but it is then a question of if it is being implemented. Let’s clean the books, and going forward the intention is to comply,” she said at a meeting with market participants last week.

In a strategy paper released last week, the DMO raised the amount it could borrow as a proportion of GDP to 40 per cent from 25 per cent to accommodate its growing debt portfolio and stimulate an economy that is recovering from its second recession in four years.

The government will borrow mainly from domestic markets, while external debt will be raised mainly from multilateral and bilateral lenders, according to the debt office head. The government is seeking to raise the dollar equivalent of 2.3 trillion naira in offshore markets and will consider issuing a Eurobond depending on market conditions.

The government also plans to issue Sukuk and green bonds to finance projects in the 2021 budget, Oniha said. The green-bond rollout is subject to approval by climate change regulators, she said.

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