The federal government will have to take foreign loans at higher cost as it seeks to finance the 2018 budget, due to the interest rate hike in the United States.
The Minister of Budget and National Planning, Senator Udoma Udo Udoma, had said the federal government would borrow N1.6 trillion to finance part of the N9.12 trillion 2018 budget.
A significant portion of this amount was expected to come from foreign borrowing.
The United States Federal Reserve last Wednesday raised interest rates again at the end of its Federal Open Market Committee (FOMC) meeting, raising concerns of increased turmoil in emerging markets (EMs).
Specifically, the Fed increased the target for the bank's benchmark rate by 0.25 per cent to a range of two-2.25 per cent.
Owing to this, the Head, Research and Strategy at FSDH Merchant Bank, Mr. Ayodele Akinwunmi, pointed out that more borrowings would compound the country's debt situation.
The Debt Management Office (DMO) had put the nation's total debt stock (federal, FCT and states) at N22.38 trillion ($73.21 billion) as at June 30, 2018. The debt office had also revealed that the federal government has so far borrowed a total of N410 billion locally to finance the 2018 budget.
But Akinwunmi explained, "We have to be very careful because our debt is becoming very unsustainable. The fact is that as interest rate in the United States is going up, the yield on borrowing in the international market will be going up as well and then interest rate will then begin to go up.
"It then means the government may not be able to borrow cheaper. So, it will be more expensive to borrow from the international market.
"So, it is no longer fashionable to say you want to take more loans from external sources, the way it was about three years ago when interest rate was almost close to zero.
"So, new borrowings will attract higher cost which would not be good for the country.
"We expect the FOMC will increase rate one more time this year, maybe in December. We estimate that they are going to increase rate three more times again, next year."
He disclosed that before the global meltdown, the US interest rate used to be as high as five per cent.
"So, if we are 2.25 per cent now, that means we are half of where we used to be before the global meltdown. So, there is tendency that interest rate goes that level," he added.
However, the Africa Economist at Citibank, Mr. David Cowan, has advised the federal government to pursue developmental policies.
"The reality in Nigeria is that politics has taken centre stage and people are not willing to invest until the politics is over. There is an argument that too much attention is focused on Nigeria's politics.
"You can even predict that it is either the APC or PDP that is going to win the election and is there really a big difference in their policies? No.
So, does it really matter? But from an external perspective, it matters because people are nervous and are not sure where all these would lead to.
"What I told people is that this is a good time for people to sit down and think about policies in Nigeria.
"I think the real growth we would see in the Nigerian economy would be from the second half of next year," he said.
Cowan advised the government that once the elections are over, whoever emerges the president should focus on fixing the power sector.
"Go back to the Egypt story where they have focused on power. We really need to fix power and build infrastructure in Nigeria.
"It is not rocket science and there is nothing new about that. But from the look of things, nothing new is going to happen between now and the election. "That is the reality. We are stuck in this double-digit inflation and low growth," he added.