The Federal Government (FG) has begun paying higher interested rates to borrow from the Nigerian financial markets as borrowing costs rise. This also means that businesses will face higher borrowing cost at a time when the operating environment is getting very tough for them to remain profitable.
The Central Bank of Nigeria (CBN) approached the financial markets on Wednesday 20 April, 2016 to borrow a total of N167.51 billion ($841.76 million) in form of treasury bills on behalf of the government.
Treasury bills are regularly issued by the CBN to help the government raise money to fund budget deficits or shortfalls. They are usually short term debts and come in maturities of three months, six months and 365 days.
On Wednesday, a report by Reuters show that the central bank sold N36.78 billion naira of the 3-month treasury bill at 7.88 percent y, about 1.78 percentage points higher than at the last auction on April 6.
A total of N35 billion worth of the 6-month Treasury bill was sold at 8.99 percent against 8.69 percent at the previous auction, while N95.73 billion of the 1-year Treasury bill was sold at 10.24 percent compared with 9.48 percent previously.
Total demand for the bills stood at N253.19 billion which was 43% lower than the N445.86 billion subscriptions at the last auction. The lower demand means that investors were still not too satisfied with the interest rates being offered by the government to borrow.
The Federal Government of Nigeria plans to borrow about a trillion naira from the Nigeria debt markets in 2016 to fund a budget deficit that could rise to as high as N3 trillion if its revenue projections are not realized. With inflation rate currently at 12.8%, many financial analysts say that they will want to see higher interest rates, above the inflation rate, to make buying the government debts profitable.