Dark Clouds Gather over Nigeria’s Bloated Debt despite Fiscal Slippage
Uncertainties lie ahead as some analysts continue to express discomfort at the spate of borrowings in Nigeria. Nigeria’s rising debt stock has lifted the debt service costs despite weak fiscal performance and lack of commensurate infrastructure level that could drive inclusive economic growth.
Worst still, government revenue generation capacity is still limited to oil and gas exports as the non-oil sector’s contribution remains low. Fiscal revenue has remained unimpressive, underperforming budget year on year, according to data from the Budget office.
Irrespective of the nation’s fiscal position, the Nigerian government is expected to meet debt service costs from revenue generated. The last time Nigeria has this kind of heavy borrowings, the nation ended at Paris Club asking for debt forgiveness.
The situation that stokes fears remains that total revenue accrued to the nation would probably be less than debt service costs sooner in the future, based on recent development where FG records witnessed a thin gap between the amount generated and the sum paid to the service debts.
In the meantime, by policymakers resolved, Nigeria will probably continue to borrow due to strained fiscal capability amidst an ambitious spending plan, analysts told MarketForces Africa in chat.
Apart from low earnings capability, the gap between fiscal and monetary policies coordination would continue to widen the output gap. Most obviously, the fiscal side appears to lack a strategy to reflate Nigeria’s earnings capability, thus resulting in a borrowing spree.
Despite heavy spending patterns, the unemployment rate remains stubbornly high while the price level has also worsened and naira has no strength in the local or international markets.
Total public debt stock has increased from N12.118 trillion in June 2015 to more than N35 trillion in June 2021, according to data from Debt Management Office. This excludes recent borrowings.
The latest data shows that 33.3% of the Nigerian labour force or economically active population were jobless, according to the National Bureau of Statistics. Also, 22.8% were under-employed while youth unemployment settled at 42.5% and underemployment 21%.
Based on the current data, Nigeria’s macroeconomic data indicates there are pressures on household financing, which has affected spending capabilities – such that is needed to drive inclusive economic growth post-lockdown.
After a tough outing in 2020, gross domestic products recovered from shock in the second quarter of 2021, up 5.01%. GDP has recorded a tepid growth of 0.11% in the first quarter and after it lost about 2% due to pandemic.
Despite the impressive year on year growth performance, quarter on quarter GDP declined by 0.8% in the second quarter of 2021, FSDH Capital said in a review.
The firm noted that historically, the value of real GDP in Q2 is usually higher than the value in Q1 mainly because the first quarter of the year is characterized by lower spending activities relative to other quarters. Analysts expect slower growth figures in Q3 and Q4 as the base effect fades which actually flattered the second quarter growth record.
“While the base effect was instrumental in influencing GDP outcomes, we believe that this 5% growth will be the highest quarterly growth rate in the year. This implies that growth in Q3 and Q4 will be lower than 5% especially as the base effect fades away.
“Real GDP performance on a quarter on quarter basis showed a decline of 0.8% in Q2-2021, suggesting that the value of real output in the first quarter was higher than what was recorded in the second quarter”, FSDH said in the report.
Some pundits said before the pandemic, the growth-starved Nigerian economy had weakened with both inflation and unemployment rate at double digits and the United States dollar were relatively scarce to the extent that CBN implement capital control.
With the steep unemployment condition, the price level has also worsened, pushing Nigeria’s misery index to the rooftop. Headline inflation rate which has been on autopilot drops had worsened along with weak local currency, naira. The base effect makes policymakers feel better about macroeconomic conditions and direction but Nigerians are indifferent.
Dollar scarcity has kept foreign investors participation in the economy on a low key while imports dominate foreign trade activities for a long time that precedes the pandemic outbreak. In the second quarter of 2021, total exports printed at N5.079 trillion against N6.950 trillion imports spent.
A growing number of analysts are expressing discomfort with Nigeria’s rising debt risk profile, say could heighten sustainability risk in the mid to long term.
Nigeria’s total public debt hits N35.465 trillion in June before Eurobond borrowing and IMF credits. The sum declared by Nigeria’s debt office excludes the ways and means obtained by the Federal Government from the Central Bank due to fiscal slippage.
At about 50% deviation, Budget Office reported in the first five months in 2021 that revenue to the government was significantly below expectation. During the year, FG has raised money from both local and foreign debt capital markets to support the 2021 budget deficit.
DMO Chief Patience Oniha had said the Eurobond call was made in order to avoid crowding out corporates from the domestic market. While oil prices continue upward movement in the global market, lower outputs from Nigeria resulted in underperforming oil export receipts.
In September 2021 Nigeria returns to Eurobond to raise $3 billion but eventually accept $4 billion due to foreign investors oversubscription, due to the juicy rate offered to creditors.
Apart from foreign currency raising, Nigeria also gets funding from the International Monetary Fund special drawing rights of about $3.5 billion, a combination of which has raised Nigeria’s external reserves near $42 billion.
The straw that break the camelback, last week, the National Assembly (NASS) approved new external borrowings of $16.2 billion, €1.02 billion, and a grant component of $125.0 million for the Federal Government.
Using CBN’s quoted exchange rate of ₦411.50 to $1.00 and Bloomberg’s quoted rate of $1.15 per €1.00, Afrinvest said in a review that the newly approved borrowings combined amount to ₦7.2 trillion.
This is nearly two-fold of FG’s retained revenue of ₦3.9 trillion in 2020, analysts at the leading investment banking firm in Nigeria said in its review.
It had hinted that the FG was seeking approval for fresh external borrowings of $4.1 billion and €710.0 million to complement the $4.0 billion raised in September from the Eurobond market to plug part of the 2021 budget deficit estimated at ₦5.6 trillion.
The sum of the newly approved external borrowings of $17.5 billion translates to an estimated increase of 230.6% over the amount submitted by the FG in September, Afrinvest said.
Analysts said the excess, $12.0 billion, was said to be a roll-over from the 2016-2018 external borrowing plan of $22.8 billion of which only $2.8 billion was disbursed over the period.
Given Nigeria’s weak fiscal capacity and huge funding need required to improve infrastructural stock over the next 10 years estimated at $1.5 trillion or ₦617.3 trillion, Afrinvest said the focus of the government should have been to promote more of private sector funding of critical infrastructure and public sector efficiency.
With the newly approved borrowing, FG’s total debt stock, excluding Ways & Means would rise to ₦39.9 trillion in the short-to-medium term from the post-Eurobond estimate of ₦32.7 trillion.
The firm added that total national debt stock excluding Ways & Means would reach ₦43.9 trillion from the post-Eurobond estimate of ₦36.7 trillion.
Resultantly, the share of debt service to revenue is estimated to remain well above 70.0% over the short-to-medium term, given the sticky revenue base and ever-growing recurrent expenditure size.
Furthermore, Afrinvest believes the reluctance of the government to plug the different sources of leakages such as subsidy payments on energy items and the over-bloated public sector would continue to compel more domestic & external borrowings, thereby heightening the risk of debt sustainability over the foreseeable future.
CBN has put about N1 trillion into Anchored Borrower Programme but for the second consecutive quarter, agricultural growth has declined from 3.4% in Q4-2020 to 2.3% in Q1-2021 and 1.3 in Q2-2021.
FSDH said the sector remains Nigeria’s largest employer of labour and is a major source of intermediate input for the manufacturing sector.
Analysts said concerted efforts are required from stakeholders to improve the productivity of the sector and also in addressing insecurity in different parts of the country. #Dark Clouds Gather over Nigeria’s Bloated Debt despite Fiscal Slippage
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