Nairametrics| The major news on the macro-economic front last week was the ‘successful’ $1 billion Eurobond offer the FG said was oversubscribed 8 times over.
From the point of view of the FG, this was a clear indication of investor confidence in the Nigerian economy. For others, the 7.875% interest rate is a contentious factor.
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Critics opine (wrongly of course) that Nigeria is taking a loan at a cost of nearly 8% when other much developed and credit worthy countries can borrow at sub 2% levels. True as that might seem, we live in a world were lenders price your bonds depending on your countries credit rating (B+ according to Fitch latest rating).
So the stronger your economy the higher your ratings, and we all know Nigeria is not particularly in a strong place economically. If you also consider that the likes of Ghana borrowed at a rate above 8% then indeed Nigeria got quite a good deal for this sale. However, the interest element still has to be paid every year and that amounts to something we will have to live with for quite some time.
Nigeria is expected to pay this interest rate every year for the next 15 years following which we will pay the principal as a bullet repayment at the end of 2032. Each interest payment however should cost Nigeria about $78, 750,000 annually. If you decide to share this debt burden among every Nigerian then that amount comes to roughly $0.43 or N133 annually assuming a population of 180 million people.
If we decide to use an exchange rate of N500 then that translates to N215 annually. By the time Nigeria decides to repay the entire (assuming population stays the same) in 2032, then we could all be on the hook for $5.56. Now let’s for a second imagine if the same loan was obtained in Naira. At an interest rate of about 17% (which is the going rate for Naira denominated bonds) Nigeria will pay an interest rate of about N51.8 million or N288 for every Nigerian. This is obviously more than double what we are going to pay for the Eurobonds.
The above scenario explains why countries seek foreign denominated loans especially for infrastructural projects. As Nigeria still earns income largely in dollars it’s earning potential is equally matched with its foreign debt obligations making it easy for us to take on more loans. Though some of us worry a lot about Nigeria’s debt service as a proportion to revenue (currently about 35% of budgeted revenue), Nigeria still has room to grow its earnings especially if the loans are channeled towards infrastructural developments that can boost local production.
Nigeria’s debt burden is currently put at about $61 billion which translates to about $361 for every Nigerian. Nigeria’s monthly minimum wage is about N18,000 and earns a tax revenue of N4 trillion annually.
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