FG Borrows to Service Debts as Revenue Falls by 54%
About 54% decline in government revenue forced the Federal Government of Nigeria (FG) to borrow from the local debt capital market to settle interest payment obligations on its large public debts.
Total public debt inched nearly N43 trillion, according to data from the Debt Management Office, DMO, which has also been affirmed by the National Bureau of Statistics (NBS). Borrowing to pay interest on debt signals sustainability pressures but DMO believes that Nigeria’s exposure still remains within the fiscal responsibility act dictates.
According to Nigeria’s budget office, total debt service in the first half of 2022 printed at ₦2.597 trillion, a level higher than the prorated sum of ₦1.978 trillion by ₦619.81 billion or 31.33 percent.
During the period, interest on the Central Bank of Nigeria (CBN) Ways and Means overdraft printed at ₦714.74 billion.
Budget Office said the sum of ₦1,333.41 billion was used for domestic debt servicing, a difference of ₦52.34 billion (4.09 percent) from the prorated half year projection, while ₦549.70 billion was spent on external debt servicing during the period under review
Last week, Fitch Ratings downgraded Nigeria’s sovereign rating to B-, saying Africa’s largest economy by GDP debt metrics is made worse because the FGN holds a higher percentage of general government debt relative to its share of revenue.
In its implementation document, Budget Office reported that total earnings underperformed expectations in the first six months. Nigeria’s gross oil revenue of ₦2,172.35 billion was collected in the first half of 2022.
This fell short of the ₦4,684.98 billion prorate budget projection for the period, according to the budget office report, a decrease of ₦2,512.63 billion or 53.63 percent against the 2022 half year budget estimate.
However, the gross revenue level achieved translates to an increase of ₦272.56 billion or 14.35 percent above the half year actual gross oil revenue recorded in 2021.
The gross non-oil revenue in the first half of the year printed at ₦3,236.60 billion; a decrease of ₦93.07 billion (2.80 percent) below the half year’s estimate of ₦3,329.67 billion.
This results from the underperformance of some of the nonoil revenue items, budget office said, noting that the net distributable revenue however stood at ₦3,277.27 billion in the first half of 2022, representing a shortfall of ₦2,091.31 billion (38.95 percent).
During the same period, interest payments reached 108% of FGN revenues amidst stagnant oil production, Fitch Rating said in the report.
Budget Office said revenue shortfalls impacted FGN Budget implementation in the second quarter of 2022. Average oil production in the second quarter of 2022 however decreased to 1.43 million barrels per day (mbpd) representing a 0.17mbpd (10.63 percent) fall from the 1.60mbpd benchmark for the 2022 Budget.
“The volume of oil production in the period was also 0.06mbpd or 4.03 percent and 0.18mbpd (or11.18 percent) below 1.49mbpd and 1.61mbpd reported in the first quarter of 2022 and second quarter of 2021 respectively”, Budget Office stated in its report.
Nigeria’s oil production will continue to be weighed down by the combination of oil theft, pipeline vandalism, and ageing infrastructure, according to analysts. This is expected to limit both gross domestic product (GDP) growth and government revenue performance.
Nigeria’s crude production levels have been on a downward trend for several years and, after averaging 1.6 million barrels per day (mbpd) in 2021, then fell to 1.2 mbpd in September 2022.
In the rating note, Fitch forecasts 2022 crude oil production, including condensate, to average 1.3 mbpd and increase slightly to 1.4 mbpd in 2023, saying general election will increase security risks in the oil-producing regions.
The note however indicates that the coming back online of the Forcardos export terminal and the Trans-Niger pipeline could help to offset continued losses from theft and vandalism.
Oil prices have brought an improvement in oil export receipts; although some of this has been offset by higher fuel imports. Fitch forecasts that Nigeria’s current account will move into a small surplus in 2022, from a deficit of 0.4% in 2021.
Despite the improvement in the current account, the global rating firm forecasts reserves to end 2022 at $36.3 billion, down from $40.2 billion in 2021, and to continue falling in 2023-2024. READ: Federal Government Borrows Large from Treasury, Bond Market
It said falling reserve levels have contributed to tight foreign-currency liquidity, as evidenced by the rapid depreciation in the parallel market rate, which was N855/$ on 8 November as compared with the official rate of N446/$.
“The inability to reliably source US dollars on the official FX market has in turn contributed to lower portfolio inflows, which will continue to put further pressure on foreign-currency liquidity”, Fitch stated.
The Nigerian government faces external debt amortisations of $2.4 billion in 2023 and $2.7 billion in 2024, which will be met through a combination of reserves drawdown and new external borrowing, most likely syndicated loans.
“We forecast total external debt service to reach 11.8% of current external receipts in 2022, which is lower than the ‘B’ median forecast of 18.6%”.
On the non-oil sector’s drive, Fitch said growth in the service sectors will continue to support GDP growth, which its forecasts at 3.0% in 2022 and 3.1% in 2023. In 2021, Nigeria returned to positive real GDP per capita growth after five years of negative per capita growth.
Nigeria’s already high structural inflation has been aggravated by global commodity price spikes and supply constraints. Nigeria’s inflation reached a 17-year high point of 20.8% in October 2022. #FG Borrows to Service Debts as Revenue Falls by 54%