The fifth step in the sequence, Step 5: The Solvency Signal, is fundamentally outward facing. By securitising the massive Ways and Means advances, the government signalled a return to orthodox debt management. The sequencing here is paramount: international creditors and rating agencies would never have believed this solvency signal if the petrol subsidy (Step 1) and multiple exchange rates (Step 2) were still draining the treasury. Domestic house-cleaning had to precede external debt rebalancing. However, the resulting high-interest-rate environment compounds the pain for a domestic real sector still waiting for the delayed social and economic buffers.
The Pre-Condition: The Ghost of Defaults Past
In the first half of 2023, the Federal Republic of Nigeria was not merely facing a liquidity crisis; it was staring into the abyss of a solvency crisis. The most terrifying statistic of that period was not the inflation rate or the exchange rate, but the Debt Service-to-Revenue Ratio. According to the Debt Management Office (DMO) and Budget Office data, this ratio had breached 96 per cent. Effectively, for every Naira the government earned, it spent 96 Kobo servicing existing debt. The state was borrowing just to keep the lights on. To fill the gap, the previous administration had resorted to an unprecedented reliance on “Ways and Means”, a euphemism for Central Bank overdrafts. By May 2023, this overdraft had ballooned to N22.7 trillion, a violation of the CBN Act’s threshold of 5 per cent of the previous year’s revenue. This was the textbook definition of “Fiscal Dominance”: the fiscal authority had captured the monetary authority, forcing it to print money to fund the deficit.
The fifth pillar of the “Tinubunomics” reform architecture, the Solvency Signal, was an emergency operation to arrest this drift toward sovereign default. This article interrogates the mechanics of this rescue: Did the securitisation of Ways and Means solve the debt problem, or did it merely hide it? How does the “Orthodox Turn” in debt management affect the cost of capital for the private sector? And critically, has the restoration of investor confidence come at the expense of domestic growth?
The Mechanism: Securitisation as a Clean-Up Operation
The primary mechanism of this pillar was the Securitisation of Ways and Means. In lay terms, the government took the N22.7 trillion overdraft, which technically had no tenor and a nebulous interest rate, and converted it into a formal, long-term bond with a 40-year maturity and a 9 per cent interest rate. Economically, this achieved two things: Transparency: It moved a massive “hidden” liability onto the formal books of the DMO. While this spiked the total public debt stock (raising the Debt-to-GDP ratio), it removed the uncertainty. Markets hate uncertainty more than they hate debt. By admitting the size of the hole, the government signalled a return to transparency. Fiscal relief: It reduced the immediate debt service burden. Instead of paying the penal interest rate on the overdraft (MPR + 3 per cent), the government locked in a lower, fixed rate. This created a sliver of fiscal space in the 2024 budget. This was the “Solvency Signal.” It told the global market: “We are cleaning up the mess. We are returning to orthodox fiscal management.”
The Return to Orthodoxy: Liability Management
Simultaneously, the administration engaged in aggressive “Liability Management.” This involved prioritising the clearance of the FX backlog, the billions of dollars owed to foreign airlines and manufacturing partners. Clearing this backlog was painful. It drained reserves that could have been used to defend the Naira. However, in the logic of “Tinubunomics,” the sovereign’s reputation was more valuable than the exchange rate. You cannot ask Foreign Portfolio Investors (FPIs) to bring new money in if the old money is still trapped. The result was a tentative stabilisation of Nigeria’s credit ratings. While still deep in “junk” territory, the outlooks shifted from “Negative” to “Stable” or “Positive.” The yields on Nigeria’s Eurobonds compressed, signalling that the risk premium demanded by international investors was shrinking. The “Default risk” had been priced out.
Critique: The Crowding Out Effect
However, our inquiry reveals a severe side effect of this orthodox turn: The Crowding Out of the Real Sector. To attract foreign capital and curb inflation, the CBN, now freed from the shackles of Fiscal Dominance, embarked on an aggressive monetary tightening cycle. The Monetary Policy Rate (MPR) was hiked to unprecedented levels (over 26 per cent). While this high-interest-rate environment makes Nigerian assets attractive to foreign carry traders (who borrow cheap dollars to buy high-yielding Naira bonds), it is devastating for domestic businesses. When the risk-free rate on government treasury bills is 20 per cent+, banks have zero incentive to lend to a factory or a farm. Why take the risk of lending to an SME when you can lend to the sovereign risk-free? This is the “Crowding Out” effect. The government’s hunger for solvency has sucked the liquidity out of the private sector. The “Solvency Signal” effectively says: “The Government is safe to lend to.” But the unintended corollary is: “Don’t bother lending to anyone else.”
Critique: The Debt Service Trap Redux
Furthermore, the securitisation did not erase the debt; it merely restructured it. The debt stock remains historically high. Even with the lower interest rate on the securitised portion, the total cost of servicing Nigeria’s debt is rising due to the devaluation of the Naira (which inflates the Naira value of external debt) and the high MPR (which inflates the cost of domestic debt). We are trading a “Ways and Means Crisis” for a “High-Interest Service Crisis.” If revenue does not grow faster than the interest rate (r > g), the debt dynamics will eventually become explosive again. The “Solvency Signal” bought time, but it did not buy solvency itself. Solvency can only come from revenue growth (Week 4) outpacing debt accumulation.
Lesson: The Price of Credibility
The overarching lesson from Week 5 is that credibility has a price tag. To regain the trust of the international market, Nigeria had to inflict pain on its domestic economy. High interest rates are the “penance” for years of fiscal indiscipline. The “Tinubunomics” model prioritises this external credibility, believing that FDI is the only way to grow the economy out of its hole. However, this creates a dangerous “interregnum.” We have the high interest rates (pain) but not yet the massive influx of FDI (gain). The foreign investors are watching, waiting to see if the reforms stick. In the meantime, Nigerian businesses are suffocating under the cost of capital.
Strategic Implications for Business
For the organised private sector, the “Solvency Signal” dictates a defensive strategy: Deleverage: In a high-interest-rate environment, debt is toxic. Businesses must aggressively pay down floating-rate debt or, if possible, restructure into fixed-rate instruments. Equity over debt: Financing expansion through bank loans is currently unviable for most sectors (except perhaps trading). The focus must shift to raising equity capital or retaining earnings. The carry trade: For those with cash, the treasury markets offer generational yields. Corporate treasurers are likely earning more from parking cash in T-bills than from operational expansion, a classic symptom of a “Crowding Out” economy.
Conclusion: A Necessary Surgery
The securitisation of Ways and Means was a necessary surgery to save the patient from cardiac arrest (default). It was not a cure for the underlying lifestyle disease (deficit spending). By signalling a return to orthodox debt management, the administration has reopened the door to global capital markets. But the house inside is still being renovated. Until the “Crowding Out” effect recedes and interest rates normalize, the “Solvency Signal” will remain a victory for the bond market, but a burden for the street market.
Next week: We move from economics to politics. In Week 6, we analyse the stability mechanism, investigating the “political containment capacity” that allowed the administration to execute these harsh reforms without triggering a regime collapse.
Profs. Aliu, Familoni, and Sarumi are faculty members and researchers at the ICLED Business School in Lekki, Lagos, specialising in entrepreneurship, macroeconomic policy, political economy, and strategic leadership. This 11-part series is adapted from their latest peer-reviewed research paper, “Reform Sequencing under Democratic Stress: Fiscal Correction, Currency Liberalisation, and Institutional Anchoring in a Resource-Dependent Economy.”
