Why do creditors keep lending to Nigeria?
A pile of money. Source: Shutterstock

According to the Medium Term Expenditure Framework (MTEF), Nigeria is set to borrow over ₦11 trillion next year to fund its budget deficit. That’s about 5% of our GDP—higher than the 3% threshold stated by the fiscal responsibility act of 2007.

There are no signs that the government will soon reduce its record-high borrowing trend.  Even worse, the ministry of finance and the budget office have already budgeted to spend more on petrol subsidies than the government will earn. 

 

Key takeaways:

  •  Lending is an investment. And two things drive the investment market: fear and greed. To a large extent, the safety of sovereign assets reduces the risk of one losing their money, while greed informs why investors lend to emerging economies with high-risk assets. 

  • Rating agencies assess a country’s willingness and ability to meet debt obligations to measure the risk associated with lending to the country. Where the credit risk ratings are low, interest rates are high to match the risk of lending to such a country.  

  • Although Nigeria’s credit risk rating is low because of its fiscal woes, investors are still likely to lend the country money because of the high interest attached to its debt and the possibility of securitising its loans with crude oil.

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With the above track record of borrowing and spending, it might be easy to conclude that investors and lenders will be unwilling to give the Nigerian government even more money. But the reality is far from that. While speaking about this in the Stears Newsroom, our finance analyst, Yomi, commented that "even with Nigeria's debt servicing ratio being more than 100%, when the FG issues a bond, it would still be oversubscribed (lenders were willing to invest more money than Nigeria requested)".

So that’s what I want us to focus on today. Why would any investor be willing to give Nigeria more money when it is clearly in fiscal distress?
 

Run for safety

The first thing we need to understand is that lending is an investment. I give you money for some time; you give me back at a

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Gbemisola Alonge

Gbemisola Alonge

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