Many African governments are currently grappling with the challenge of refinancing their domestic debts at increasingly high costs, all while straining the funding capacity of their central banks to bridge significant gaps in their finances. This situation has left many nations in dire financial straits, according to a report from S&P.
This crisis is exacerbated by the global tightening of monetary policies, making it difficult or unaffordable for many developing countries to access the global debt market. The Federal Reserve, for instance, has raised interest rates to multi-decade highs of 5.25-5.5 percent, with market analysts predicting more rate hikes in the near future.
The S&P report coincides with the Federal Reserve’s rate-fixing arm’s second-to-last meeting, which concluded with no change in interest rates. The report analyzes the domestic financial predicaments of leading African economies, including Nigeria, Egypt, Ghana, among others. This report is particularly relevant as Nigeria’s newly inaugurated administration struggles to manage governance amid formidable fiscal challenges.
The Minister of Finance and Coordinating Minister of the Economy, Wale Edun, previously assured Nigerians that the administration would avoid accumulating debt to fund its activities. However, less than three months after this assurance, it appears that they may have sought additional loans, as foreign financiers are growing increasingly skeptical about the country’s ability to meet its financial obligations.
In preparation for the 2024 budget presentation, the Federal Government may seek at least N8.7 trillion to partially cover the estimated N9 trillion deficit. The government hopes to generate N206 billion from privatization proceeds, a strategy that has historically yielded little success.
The Medium-term Expenditure Framework (MTEF) for 2024 to 2026, submitted to the National Assembly, forecasts a total federal government deficit of N30.7 trillion. With expectations of less than N700 billion from privatization of public assets, the government is looking to raise the majority of the needed funds from both domestic and foreign debt markets.
As a common trend among fiscally strained African countries, the domestic market is expected to contribute 71 percent, or 21.4 percent of the debt funding. S&P describes this as a major crisis affecting many African leaders.
While Nigeria is not among the hardest-hit countries, such as Egypt, Zambia, Mozambique, and Ghana, in terms of domestic debt refinancing crises, it faces a significant debt challenge, with its debt-to-revenue ratio exceeding 100 percent. The fiscal deficit for this year’s budget performance is already estimated at N11.6 trillion, or over 50 percent of the total budget, according to government documents.
The Central Bank of Nigeria, which has previously accommodated the Federal Government’s fiscal excesses with unrestricted overdrafts, now promises to adhere to the regulations in managing its affairs. This shift may pose a challenge to the government’s plans for continued fiscal spending.
Economists have raised concerns about the exhaustion of the domestic debt market’s capacity, which stands at about N30 trillion. Nigeria has faced delays in fulfilling forward contracts, potentially leading to financial blockages and credit downgrades, affecting its ability to source funds from the financial market.
The country’s reliance on Central Bank overdrafts and local funding sources has increased, negatively impacting the private sector’s access to capital for expansion and job creation. The situation has led to difficulties for domestic financiers.
Real interest rates on domestic debt remain negative in several African countries, including Egypt, Ethiopia, and Nigeria. Egypt, in particular, has experienced a decrease in foreign investor interest since the onset of the COVID pandemic. The report also highlights risks associated with Egypt’s debt structure.
Zambia recently reached an agreement with bilateral creditors for debt relief under the G-20 Common Framework. However, Zambia’s weak fiscal measures pose significant risks to its domestic debt capacity.
Mozambique’s government has made late payments on domestic commercial debt, constituting a selective default on its local currency rating. The report notes that Mozambique has one of the highest domestic roll-over ratios in Africa.
In summary, many African governments are struggling to refinance their domestic debts amid rising global interest rates and limited access to the global debt market. This situation has serious implications for their fiscal stability and access to financial resources.