Borrowings Analysts Expect Nigeria to Violate Debt to GDP Limit
Patience Oniha, DMO Chief

Borrowings: Analysts Expect Nigeria to Violate Debt to GDP Limit

Estimated to surge above 40%, Nigeria’s total public debt to gross domestic product (GDP) is estimated to hit 42.4% in the fiscal year 2023, analysts said in their market updates, in violation of the Fiscal Responsibility Act.

In June, Debt Management Office (DMO) estimated that the Public Debt-to-GDP ratio would increase to 37.1 percent in 2023 relative to 23.4 percent as of September 2022.

Nigeria imposed a 40% limit on its debt as a proportion of the country’s economic size. However, analysts see continuous borrowing as a downside to the DMO estimate which they considered as quite conservative given the macroeconomic condition and market dictates.

Nigeria’s public debt rose to N49.85 trillion in the first quarter of 2023.  Nigeria’s market observers and analysts have identified sustained budget deficits and fiscal slippage as major drivers of borrowings by the federal government.

Still, revenue performance has remained unimpressive due to minimal contribution from non-oil exports. In the first three months of 2023, Nigeria’s public debt outstanding increased by 7.8% or N3.6 trillion from  N46.25 trillion at the end of 2022, driven in part by weak local currency use to convert foreign loans.

The external debt component of the country’s public debt has increased at a slower pace than the domestic debt component while the debt-to-GDP ratio has increased slightly. Nigeria had outstanding multilateral loans which account for 48.41% of total debt outstanding to $20.66 billion, according to the DMO report, which includes $3.3 billion from the IMF, $13.84 billion from the IDA, and $488.5 million from the IBRD.

Other loans include $1.57 billion from the African Development Bank, African Development Fund ($972.6 million), Islamic Development Fund ($144 million), and the International Fund for Agricultural Development which stood at $272 million among others

In its note, analysts at Cordros Capital said the increase primarily reflects new borrowings to fund the 2023 budget deficit, given higher expenditure relative to the rise in revenue. It is noted that the total domestic debt stock rose by 9.7% in the first three months of 2023 to N30.21 trillion, while the external debt outstanding increased by 5.0% to N19.64 trillion in the same period.

Nigeria’s public debt figure, according to DMO, excludes CBN’s Ways & Means Advances. Debt Office indicates a plan to include about N23 trillion overdraft from the apex bank in Q2-2023 since it received the National Assembly approval to securitise it in May 2023.

“We now expect the public debt profile to settle at N89.11 trillion or 42.4% of GDP in 2023 versus NGN46.25 trillion or 23.2% of GDP in 2022”, Cordros Capital said in its note Analysts said they hinged their expectation on the securitisation of the CBN’s Ways & Means Advances, new borrowings to fund the 2023 deficit, and the impact of FX liberalisation on the naira value of external debt.

“… we expect the local currency depreciation to add N11.32 trillion to the public debt outstanding in 2023”, analysts at Cordros Capital Limited estimated. In its macroeconomic update, Cowry Asset Management Limited stated that Federal Government said it is committed to reducing the country’s debt burden, but it is unclear how it will achieve this goal.

“… The government needs to take steps to reduce the debt burden to avoid a debt crisis in the future. This warrants a sizeable reduction in the debt-to-GDP ratio to mitigate these risks or impending crises”, the investment firm said in its note.

According to Cowry Asset, this could include reducing the budget deficit, increasing revenue, and restructuring the debt. “…we think the increase in Nigeria’s public debt can be attributed government’s borrowing to finance the deficit, the naira depreciation, and the rise in interest rates to 18% during the period.

“Also, the increase is buoyed by the federal government’s external debt stock (commercial loans) which rose due to the depreciation of the local currency”. >>Nigerian Treasury Bills Yield Rises to 7%

Despite the surge, Nigeria’s public debt is still considered to be sustainable by most international standards such as 50% by the World Bank/IMF and slightly above the self-imposed 40% limit by FG’s fiscal responsibility act.