Budget Deficit- FG Raised N5.28tn via Bond in 10 Months

Kayode Tokede

In an exclusive interview, it was revealed that the federal government of Nigeria, through its Debt Management Office (DMO), has successfully raised ₦5.28 trillion via the FGN Bond market over the past ten months to address the anticipated budget deficit for 2024. The results from recent FGN auctions conducted by the DMO indicate that investors were offered an estimated ₦5.48 trillion, with total subscriptions reaching about ₦6.44 trillion during this timeframe.

FGN Bonds serve as key debt instruments issued by the federal government to finance public projects and manage the national budget. Essentially, they enable the government to borrow money from investors with a commitment to repay the principal at maturity, alongside regular interest payments, known as the bond’s coupon rate.

Our investigation uncovered that there has been a marked interest in long-term FGN Bonds among investors since the start of 2024, which has played a crucial role in the funds raised over these ten months. The auctions conducted by the DMO have shown a distinct shift in investor preference towards bonds that offer higher yields and longer tenors against a backdrop of cautious market sentiment.

The steady demand for FGN Bonds is reflective of the inflationary pressures currently facing Nigeria. Notably, the long-term auctions during this period attracted substantial investor interest, which led to higher allotments. Between January and October 2024, the DMO actively re-opened several FGN Bonds and progressively increased interest rates to entice investors, even amidst persistent double-digit inflation.

In the month of February 2024, the DMO offered its highest amount yet, approximately ₦2.5 trillion, ultimately raising ₦1.49 trillion with a subscription level of ₦1.9 trillion. Conversely, the auction in September 2024 was the lowest, offering ₦150 billion, but resulting in allotted amounts of ₦264.53 billion and subscription figures of ₦414.88 billion.

The federal government’s budget for 2024 anticipates a significant deficit, representing the difference between projected revenues and expenditures. According to President Bola Ahmed Tinubu’s presentation in November 2023, the total budget is set at ₦27.5 trillion, with a projected deficit of ₦9.18 trillion, which accounts for 3.88 percent of GDP. This is a noteworthy reduction from the ₦13.78 trillion deficit recorded in 2023, equating to 6.11 percent of GDP.

“The deficit will be financed through new borrowings amounting to ₦7.83 trillion, along with ₦298.49 billion from privatization proceeds and ₦1.05 trillion drawn from multilateral and bilateral loans earmarked for specific development projects,” President Tinubu explained during his budget presentation to the national assembly.

Recent auction data from October 2024 indicated that the DMO raised ₦289.6 billion, marking a 9.5 percent increase compared to the ₦264.53 billion raised in September. The strong participation in October reflects the sustained demand for longer-dated instruments, which provide better returns in an environment of rising interest rates.

The auction on October 21 featured two re-opened tranches of existing bonds: the 19.30 percent FGN APR 2029 (5-year bond) and the 18.50 percent FGN FEB 2031 (7-year bond). Initially, the government offered ₦180 billion during this auction, allocating ₦90 billion to each bond, slightly lower than the ₦190 billion offered in September across three different tenors.

The 5-year bond attracted subscriptions totaling ₦60.737 billion, while the 7-year bond experienced a significant uptick in bids, reaching ₦328.584 billion. Ultimately, ₦57.237 billion was allotted from the 5-year bond, and ₦232.360 billion from the 7-year bond, suggesting that the government capitalized on the robust demand to fulfill its financing requirements at prevailing rates.

The October auction also saw a notable rise in marginal rates, indicating investors’ expectations for higher yields due to inflation concerns and tighter monetary policies. The 5-year bond was allotted at a marginal rate of 20.75 percent, up from 19.00 percent in September, while the 7-year bond’s rate increased to 21.74 percent from 19.99 percent.

Analysts emphasize that the strong demand for FGN Bonds demonstrates investor confidence, as these instruments offer high returns on investment. Notably, Dr. Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, noted that the federal government plans to borrow more in 2024. He explained, “Given the volatility and foreign exchange challenges, it makes more sense to source funds from the domestic market rather than the international one. This situation reflects our macroeconomic challenges and the government’s weak fiscal policies.”

Concern over Nigeria’s escalating debt profile has been mounting in recent years. Mr. David Adnori, Vice President of Highcap Securities Limited, cautioned that the nation’s debt levels are becoming unsustainable. He noted that “ways and means” refer to the Central Bank of Nigeria’s lending to the federal government, and while the DMO stated that the “securitization of ways and means” is a common practice in many countries, it requires careful consideration beyond the DMO’s purview.

In the finance sector, Mr. Tajudeen Olayinka, a banker and stockbroker, remarked on the prevailing appetite for FGN Bonds, suggesting that Pension Fund Administrators and local investors prefer instruments with lower volatility that assure steady capital returns, despite lower yields. He added that concerns about interest rate risks have contributed to some under-subscription in certain issuances, as investors remain acutely aware of the ongoing economic challenges and persistent inflationary pressures.