IMF Sees Nigeria Debt Shift Increasing Exchange-Rate Risks

Nigeria’s plan to increase its foreign borrowing to reduce debt-servicing costs could raise its exchange-rate risks, according to the International Monetary Fund.


The West African nation’s government plans to issue $5.5 billion of dollar-denominated securities by the end of the year, most of which would go to refinancing existing domestic debt. The issuance will more than double Nigeria’s outstanding dollar bonds to about $9 billion and is in line with a strategy to shift the economy’s debt profile by doubling the portion of foreign debt to 40 percent of the total.

“The IMF understands the authorities’ needs to rebalance its portfolio of domestic to foreign debt,” Abebe Selassie, director of Washington-based lender’s African department, said by phone last week. “Such a shift would however make the economy more vulnerable to exchange-rate depreciation.”

The naira weakened against the dollar following the crash in the price and output of oil, Nigeria’s biggest export, increasing inflationary pressures for a country that imports everything from fuel to food and curbing economic growth. While price growth slowed for eight consecutive months to just under 16 percent in September, it’s been above the upper end of the central bank’s 6 percent to 9 percent target range for more than two years.

Nigeria plans two issues, one of $2.5 billion and another of $3 billion, including a mix of Eurobonds and diaspora notes.

With Nigeria’s Eurobonds yielding an average 6 percent, almost 9 percentage points less than pricing for naira bonds, the government expects to reduce its debt-service costs, which the IMF sees almost tripling to about 62 percent of revenue this year. Nigeria is struggling to free up funds to stimulate its economy to grow after it contracted by 1.6 percent in 2016, the first such slump in 25 years.

“We expect that it will help the government extend its maturity profile, decrease debt-servicing costs, and reduce private sector crowding out,” Selassie said.

The Debt Management Office Director-General Patience Oniha said last month she doesn’t see any currency risks given the government’s growth plans that will generate more foreign exchange.

Africa’s biggest producer of crude aims to increase output to 2.5 million barrels a day next year from 1.77 million barrels a day currently. Nigeria is also increasing investment in agriculture to reduce food imports and lessen pressure on its currency, Oniha said.

The naira strengthened 0.1 percent to 356.1 per dollar by 4:03 p.m. in Lagos on Monday. The yield on Nigeria’s $500 million of Eurobonds due July 2023 fell eight basis points to 5.39 percent.