Nigeria’s Debt to Revenue Rises to 348% amidst Starvation
Uncertainties loom in Nigeria as high subsidies and debt pressures have remained downside risks to the country’s rating which continue to trend behind an investment grade. Amidst hunger and deprivation, Nigeria’s debt hit 348% of total revenue, according to Fitch Ratings.
Lack of foreign investors’ participation in the economy has resulted in dollar shortage, while the monetary authority has become reactionary – adopting combating regulations rather than being strategic in fighting a subtle currency war.
In particular, rising debt stock and associated interest payments data raise dust on government borrowing policies. While FG claims to be on the side of infrastructure development, realities appear to be far different from fantasies.
“There is no electricity, no good road network. Nigerians are battling with high food prices and naira continues to lose store of value with double-digit high headline inflation at 15.70%, unemployment at 33.3% and worsening insecurities”
At the end of the fiscal year 2021, Nigeria’s debt to revenue printed at 348%, according to the global rating agency, Fitch, saying that increasing non-oil revenue helped the nation’s debt affordability metrics.
Debt Management Office (DMO) recorded N38.005 trillion in total public debt as of year-end 2021 but this excluded Central Bank of Nigeria’s Ways and Means which some investment firms see as backdoor funding for government activities.
The Federal Government (FG) debt to government revenue at 755% is much higher, Fitch Rating said in the latest rating note, saying this form relatively weak B rating accorded to Nigeria.
And, Central Bank of Nigeria (CBN) has continued to fund the government activities with overdrafts that have remained unsecuritised, against its own 2007 Act.
In a report, Fitch Ratings has affirmed Nigeria’s Long-Term Foreign-Currency Issuer Default Rating at ‘B’ with a stable outlook.
‘B’ Ratings denote a significantly elevated level of default risk relative to other issuers, making the country highly risky due to speculative credit standing.
According to the rating note, higher oil prices provided an advantage due to a focus on hydrocarbon revenues to drive fiscal performance. Higher global oil prices will drive an improvement in external liquidity and support near-term economic growth, Fitch Ratings noted.
READ: FG revenues forecast to rise 22.9% on subsidy removal
It said these improvements are balanced against high hydrocarbon dependence, which leaves Nigeria vulnerable to negative oil price shocks, and structurally low domestic revenue mobilisation.
The continuation of fuel subsidies will limit upside from higher oil prices on Nigeria’s public finances, it stated.
Fitch forecasts are based on December 2021 oil price assumptions of $70 per barrel in 2022 and $60 per barrel in 2023, but the rating said it has considered alternate oil price scenarios, including oil prices at current levels.
“While substantially higher oil prices could lead to a higher outcome of Fitch’s Sovereign Rating Model, we could deem such a change temporary and reflective of Nigeria’s high exposure to oil prices, which also entail heightened risks of a renewed downcycle”.
The rating note however sported that there is an improvement in the nation’s external liquidity position. Nigeria’s gross international reserves have been bolstered by higher oil export receipts, which will continue in 2022.
“We forecast reserves to increase to $43 billion in 2022, up from $40.5 billion at end-2021. We estimate that the combination of oil exports and remittance inflows helped to bring the current account (CA) into balance in 2021 after a deficit of 4.2% of GDP in 2020.
“Our baseline assumption is for the CA balance to remain broadly unchanged in 2022, but sustained higher oil prices at their present level of $112 per barrel could widen the 2022 current account surplus to 4% of GDP, with upside to Nigeria’s international reserves”.
The positive feelings is however douse by fuel subsidies payment which has continued to weaken Nigeria’s fiscal balance following failure to implement the totality of the Petroleum Industry Act.
In January 2022, the government reversed a plan to phase out the implicit fuel subsidies that support price controls on petroleum.
This has necessitated an adjusted federal government budget for 2022 with a deficit target that is 0.6% of GDP wider than the original target, due to the subsidies – with an additional equal hit to the other levels of government.
“Higher oil prices would also boost the subsidy cost, denting the benefit of higher global oil prices to the budget. We forecast the 2022 general government fiscal deficit to remain broadly unchanged from 4.1% of GDP in 2021”, Fitch said.
However, Fitch Ratings analysts estimate that a $10 per barrel increase would narrow the fiscal deficit by 0.5% of GDP. On the downside, Nigeria is battling with high debt service costs due to its rising borrowing profile. This is noted to impact the credit rating for the largest economy in Africa.
Fitch forecasts general government debt, including the Federal Government of Nigeria’s (FGN) overdraft with the Central Bank of Nigeria (CBN), to increase to 32% of GDP by end-2022, well below the current ‘B’ median forecast of 79.1%.
It said debt affordability metrics related to revenue are helped by an increase in non-oil revenue to an estimated 5.6% of GDP in 2021, from an average of 3.9% in the previous five years.
However, Fitch explained that debt still stood at 348% of revenue end-2021, above the current ‘B’ median of 325%. The ratio of FGN debt to government revenue is much higher, at over 755%, according to Fitch Rating.
“If oil prices remain above Fitch’s current assumptions, higher nominal GDP and oil revenue will likely lead to some improvement in debt metrics”.
It noted that economic growth recovered from shock as Nigeria’s gross domestic bucked the trend following the pandemic. Real GDP growth recovered in 2021 to 3.4%, after a 1.8% contraction in 2020.
Growth was driven by the non-oil sector, particularly agriculture and manufacturing, which were supported by interventions by the CBN, according to the rating note.
The global rating firm said that higher oil receipts will boost foreign-currency liquidity and support a continued recovery in the non-oil sectors, but oil production will remain below capacity.
Fitch forecasts GDP growth in 2022 and 2023 to remain just above 3%, noting that operational issues dampen oil production amidst a steep rise in crude oil prices.
Fitch forecasts crude oil production, including condensates, to remain at 1.7 million barrels per day in 2022 and to increase to 1.8 million in 2023.
“The passage of the Petroleum Investment Act in July 2021 provides some upside to hydrocarbon production in the medium term, but we see also risks that global moves to reduce oil sector investment will affect Nigeria, as evident by Shell’s announcement of their intended exit from the country”.
The Dangote refinery, broadly sufficient to fulfil Nigeria’s domestic demand for refined products, will come on line in the second half of 2022, reaching full capacity in late 2023.
“This will provide some support to Nigeria’s external position and to economic growth through lower fuel importation and transportation costs”.
On price level, Fitch forecasts annual average inflation to fall to 14.6% in 2022, from 17% in 2021, given the insulation from global energy prices by fuel subsidies.
It said inflation will remain well above the ‘B’ median of 4.6%, driven by food prices, global commodity market disruptions, and by supply constraints due to import restrictions.
In its latest release, the National Bureau of Statistics (NBS) said the headline inflation rate inched up 10 basis points to 15.70, halting the downward trend spotted in January 2022.
Amidst double digit inflation rate, the CBN has held official policy rates steady since September 2020 in support of the economic recovery.
“We expect the central bank to continue managing domestic liquidity primarily through the use of the cash reserve ratio; although at least one interest rate increase is likely”, Fitch said in the rating note. #Nigeria’s Debt to Revenue Rises to 348% amidst Starvation
