May 9, 2023/CSL Research

After deliberations, the Senate finally approved the request by President Muhammadu Buhari to restructure the N22.7trn loans the Central Bank of Nigeria (CBN) extended to the Federal Government under its ‘’Ways and Means provision’’. The provision allows the government to borrow from the apex bank (as a lender of last resort) if it needs short-term or emergency finance to fund delayed government expected cash receipts, especially oil
revenue. The terms of the securitization of the Ways & Means advances as gazetted by the Debt Management Office (DMO) involves the issuance of debt securities with a 40-year tenor by the FG to the CBN, with an interest rate of 9% and a 3-year moratorium on principal repayments. The securitization will add the Ways and Means advances to the public debt balance.

Between 2007 and 2015, the previous administrations only took a combined total of N869bn from the Ways and Means window. However, in the last eight years, the current administration has collected N23.7trn. Total public debt at the end of 2022 was N46.3trn while the expected borrowings for 2023 comes to N8.8trn (domestic and foreign). If we include the ways and means of N22.7trn to be securitized, total expected public debt for 2023 comes to 77.8trn. A total debt stock rising to N77.8trn will take the country’s Debt to GDP ratio to 38.4%. This increase in public debt may require the DMO to raise the public debt ceiling from its current level of 40% of GDP contained in the medium-term debt management strategy paper.

One notable benefit of the securitisation is the reduction in the FG’s debt service burden, as the new rate for repayment is 9% per annum compared to MPR (18%) + 3% previously. This is critical, given the rising debt-service-to-revenue ratio estimated at approximately 96% in 2022. Also, debt transparency will improve as securitised Ways & Means will now be included
in public debt statistics even though the Section 38(3)(B) of the CBN Act prohibits the CBN from guaranteeing securities for which it is an interested party. Consequently, an amendment to the Act may be necessary to proceed with the securitization.

Technically, a 9% rate on 40-year Bond implies an inversion of the bond yield curve. However, considering these instruments will not be issued to the public, we see no effect on the fixed income market.