Experts Estimate 39.2% Public Debt to GDP as Fiscal Deficit Rises
- Nigeria’s federal fiscal deficit will widen from 4.2% of GDP in 2019 to 5.3% in 2020 before moderating slightly to 5.1% in 2021.
- Depressed oil export earnings and weak domestic economic activity amid the Covid-19 pandemic will weigh heavily on Nigerian fiscal revenue in 2020.
- A lack of revenue will limit the government’s spending capacity for capital projects, but current expenditure will likely remain elevated.
- An increased dependence on domestic and foreign borrowing amid the oil price crash will see already elevated debt servicing costs rise over the coming years.
By 2021, Nigeria’s public debt burden is estimated to hit 39.2% of the nation’s gross domestic product (GDP), Fitch Solutions stated in its country risk and industry research report.
Comparing with peers in the Sub-Saharan Africa region, the firm stated that this will remain significantly smaller than other major SSA economies’ debt burdens.
The firm said it does not expect the depreciation of the local currency to threaten debt sustainability over the coming years with the majority of Nigeria’s public debt being domestic.
However, Fitch stated that it expects that rising debt servicing costs will continue to limit the scope for growth-supporting public investment that has been observed since the 2016 recession, which we expect to limit the economic recovery after 2020.
According to the report, the depressed oil export earnings and domestic economic activity amid the Covid-19 pandemic will weigh heavily on Nigerian fiscal revenue in 2020.
Nigeria’s average total revenue from 2015 to 2019 stood at around 3% of GDP, the lowest rate in Sub-Saharan Africa (SSA).
The regional average was 20.5%.
In 2020 oil revenue, which accounted for an average of 64.9% of total revenue from 2009 to 2018, will decline relative to recent years, Fitch stated.
The 2020 finance bill signed into law by President Muhammadu Buhari in January assumed an oil price of USD57.0 per barrel (/bbl) and crude oil production of 2.18 million barrels per day (b/d).
However, Fitch Solutions said with global demand for crude oil and global oil prices have collapsed in Q1:20.
FG had also proposed an amended budget assuming an oil price of USD30.0/bbl – in line with our Oil & Gas team’s 2020 average Brent crude forecast – and crude oil production of 1.7 million b/d.
With Brent crude oil at just USD22.1/bbl at the time and OPEC+ having agreed to implement production cuts as of May 1, Fitch said it noted the downside risks to already constrained oil revenue
“Generation of non-oil revenue will also face considerable headwinds over the remainder of 2020”, the firm stated in the report.
The government previously expected revenue growth to receive support from an increase in the rate of VAT from 5.0% to 7.5%.
But even before the Covid-19 pandemic, Fitch said it viewed revenue assumptions as overly ambitious owing to Nigeria’s elevated unemployment rate.
The latest official unemployment rate figure being 23.1% as of third quarter of 2018 – alongside high and rising inflation weighing on consumption.
MarketForces reported that Nigeria’s headline inflation rate has continued to rise, hitting 12.40% in the month of May, 2020.
“We expect that inflation will accelerate from an average of 11.4% in 2019 to 13.5% in 2020, with upside risks due to the weakening of the naira exchange rate”, Fitch stated.
The firm stated that public concerns regarding the virus will further limit private consumption and business activity over the coming months.
“We expect revenue sources such as customs revenue, VAT and income taxes to fall relative to 2019 and forecast the federal government to retain revenue of ₦3.2 trillion in 2020 (2.1% of GDP) compared with the 2010-2019 average of ₦3.6 trillion.
A lack of revenue amid the pandemic will limit the government’s spending capacity, the report explained.
In light of lower revenue expectations, Finance Minister Zainab Ahmed noted in March that cuts to non-essential capital expenditure would have to be made so that spending could be better prioritised to tackle the pandemic and mitigate the damage to the economy.
However, this follows a continuation of the trend of underperformance in capital spending in 2019.
This reached only 57.9% of the budget’s implementation target for the year due to lower than projected oil revenue and disbursement delays.
Fitch Solutions forecasts capital expenditure of ₦1.1 trillion in 2020, down from ₦1.3 trillion in 2019, with risks to the downside amid revenue constraints.
It explained that Government efforts to cap current expenditure, which typically accounts for more than 70% of total spending, and limit the fiscal deficit will face obstacles.
It recalled that non-debt recurrent expenditure and debt servicing costs exceeded the government’s targets in 2019.
The firm expects that the factors that drove this, such as the government’s increased borrowing since the 2014 oil price crash and elevated security risks requiring greater security expenditure, will persist in 2020 alongside the need to bolster spending on health services amid the pandemic.
“We forecast an increase in recurrent expenditure from ₦6.7 trillion in 2019 to ₦7.6 trillion in 2020, with risks in our view weighted more heavily to the upside”, Fitch stated.
This increase in current spending will prompt a significant increase in borrowing.
An increased dependence on borrowing amid the oil price crash will see already elevated debt servicing costs rise over the coming years.
Increased borrowing and years of below-target fiscal revenue caused debt repayments to rise from 25.1% of FG revenue in 2014 to 51.6% in 2018.
Fitch said it expects that this will continue to rise over the coming years.
The IMF has confirmed financing of USD3.4 billion for Nigeria via its Rapid Financing Instrument, which is provided to countries facing balance of payments crises when a full macroeconomic reform programme is not viable.
The government is also seeking USD2.5 billion from the World Bank and USD1.0 billion from the African Development Bank.
Following plans to sell Eurobonds in 2020 being abandoned, on April 28 the Senate approved Buhari’s request to issue ₦850 billion of domestic debt in 2020.
“We forecast that Nigeria’s public debt burden will rise from an estimated 31.7% of GDP in 2019 to 39.2% in 2021.
“This will remain significantly smaller than other major SSA economies’ debt burdens, and with the majority of Nigeria’s public debt being domestic, we do not expect the depreciation of the currency to threaten debt sustainability over the coming years”, Fitch Solutions stated.
“We expect that rising debt servicing costs will continue to limit the scope for growth-supporting public investment that has been observed since the 2016 recession, which we expect to limit the economic recovery after 2020”, Fitch explained.
Experts Estimate 39.2% Public Debt to GDP as Fiscal Deficit Rises