Funding Pressure to Reduce as IMF, W/Bank Plan Debt Cut for Nigeria
President Muhammadu Buhari
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Funding Pressure to Ease as IMF, W/Bank Plan Debt Cut for Nigeria

Following the planned debt cut by the International Monetary Fund and the World Bank, some analysts have said the Nigeria’s debt burden is expected to ease.

Analysts at Cowry Asset Management Limited is of the opinion that the planned debt reduction by the Bretton Woods institutions would provide Nigeria succour.

Particularly, analysts expect that there will be relieve in the area of debt servicing which has negatively impacted Nigeria’s distributable income.

Funding Pressure to Reduce as IMF, W/Bank Plan Debt Cut for Nigeria
President Muhammadu Buhari

In the proposed spending plan for 2021, debt service costs is expected to gulp about 24% of the budget size of ₦13.08 trillion.

In January 2021, a total sum of $500 million would matured, follow by another $200 million in June and another $500 million in June, 2023.

In the second quarter of 2020, total public debt printed at ₦31.01 trillion, which translates to a ₦19 trillion addition since 2015.

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In its annual meeting, the President of the World Bank Group, Mr. David Malpass and the Managing Director of the International Monetary Fund (IMF), Ms Kristalina Georgieva hinted about plan to provide debt reduction for Nigeria and other International Development Association (IDA) countries which were hit by COVID19 pandemic.

According to these Bretton Woods Institutions, the target of the plan is to return venerable countries back to the path of economic growth.

It would be recalled that Nigeria’s Gross Domestic Product (GDP) contracted by 6.10% in Q2:2020 as a result of COVID-19 pandemic.

Also, IMF boss estimated that the cumulative funding needed by African countries to cushion the effect of the COVID-19 pandemic hovered around USD1.3 trillion.

It was mentioned that African countries needed to focus on ambitious reforms that would make them an attractive investment destination even for domestic private capital.

In the bid to see an end to the COVID-19 pandemic and return countries to the path of economic growth, IMF reportedly earmarked about USD12 billion for the purchase and distribution of COVID-19 vaccines, test kits and treatment.

In the last five years, total sum of N19 trillion has been added to the nation’s total public debts book, rising faster than level of capital expenditure to support the nation’s infrastructural development.

In servicing its external debt portion, between April and June, 2020 Federal Government expended a total sum of $USD287.043 million.

This translates to about ₦108.879 billion between April and June if converted at the Central Bank of Nigeria’s official exchange rate of ₦379 to a dollar.

Of this sum, 55% went to commercial creditors, 33% to multilateral organisations and remaining were split between bilateral and others category in 5% and 7% respectively.

Compare with Q2:2019, external debt servicing cost increased 13.8% year on year from $252.3 million reflecting multilateral and bilateral debt service obligations.

FG’s decision to continue to ramping up loan to finance capital expenditure without corresponding program to reflate revenue could lead into difficulty servicing foreign debt, an economist told MarketForces.

Recently, Nigeria finance hit iceberg such that there was a marginal difference between total revenues accrued to the nation and associated obligations to creditors.

To some industry’s observers, borrowing to finance capital projects that would support economic prosperity and development is not the issue, but clogs in the revenue sides.

To raise revenues accrue to government, experts have been advocating for some sorts of structural reforms.

While the Debt Management Office latest report showed that total public debt has expanded 8.31% to ₦13.1 trillion, debt cost declined.

By DMO data, Nigeria’s total public debt stock for the second quarter of 2020 increased by 8.31% to ₦31.01 trillion as at June 2020.

Comparatively, this means that Nigeria’s total national debt stock skyrocketed by 155.85% to ₦31.01 trillion in June 2020 when compare with ₦12.12 trillion in June 2015.

In absolute term, this means that government has added a whopping sum of ₦18.89 trillion in the spate of five year, but capital projects seem to worth below the gargantuan amount.

The increase in debt profile as reported as against ₦28.63 trillion debt size as at March 2020 was supported by devaluation of the local currency, though FG received additional loan support from international creditors.

Providing additional insight, Cowry Asset Limited said in a macroeconomic note that the increase in the country’s total debt stock was chiefly due to a rise in external debt stock.

In the period, external debt stock increased 13.78% to ₦11.36 trillion (or USD31.48 billion at ₦361.00/USD) as at June 2020 from ₦9.99 trillion (or USD27.67 billion at ₦361.00/USD) in March 2020.

It would be recalled that amidst the outbreak of COVID-19, Nigeria received additional USD3.36 billion worth of loan from International Monetary Fund (IMF) in Q2.

Despite the increase in external debt stock, external debt service payments fell to ₦103.62 billion (or USD287.04 million) as at June 2020 from ₦170.60 billion (or USD472.57 million) as at March 2020.

Similarly, Cowry Asset explained that domestic debt stock increased by 5.39% to ₦19.65 trillion in June 2020 (from ₦18.64 trillion as at March 2020).

This occurred as the Federal Government of Nigeria (FGN) increased its regular and Sukuk bond issuances by ₦681.75 billion and ₦162.56 billion respectively within the period under review.

Further breakdown of the domestic debt figure showed that FG’s domestic debt stock rose to ₦15.46 trillion as at June 2020 (from ₦14.53 trillion as at March 2020).

Also, states’ debt increased slightly to ₦4.19 trillion (from ₦4.11 trillion).

At the domestic front, debt service payment plunged quarter on quarter by 48.65% to ₦312.81 billion in Q2 2020 from ₦609.13 billion in Q1 2020.

Analysts explained that declined recorded in local debt service was due to lower interest rate environment which has seen yields on government instruments nose-diving in the fixed income market.

In its macroeconomic note, Afrinvest, a leading investment firm in Lagos said public exposure  translates to a debt to GDP ratio of 20.4% based on 2020 GDP estimate, from 19.0% as at year-end 2019.

The strong increase in the public debt stock was driven by the devaluation of the official exchange rate from ₦306.00/$1.00 to ₦361.00/$1.00 as well as external and domestic borrowing used to plug the large fiscal deficit brought by the COVID-19 pandemic.

FG’s Budget support loan of ₦1.2 trillion ($3.4bn) was accessed from IMF’s Rapid Financing Instrument (RFI) in April 2020, which in addition to currency devaluation resulted in a 36.5% year on year and 13.8% quarter on quarter rise in external debt (FG & States) to ₦11.4tn ($31.4bn).

Overall, FG’s external debt stock increased 18.9% ($4.3bn) to $27.2 billion while the local currency value increased 40.1% year on year to ₦9.8 trillion.

Afrinvest noted that the external debt of States remain unchanged at $4.3 billion, the local currency value rose 17.5% year on year to ₦1.5 trillion.

It noted the 15.2% growth in FG’s domestic debt 15.2% and 6.9% quarter on quarter increased to ₦15.5 trillion as the DMO ramp up domestic borrowing to plug budget deficit given low yields in the fixed income market.

In terms of debt servicing, total payments in Q2:2020 rose 42.6% on a year on year basis to ₦416.4 billion, driven by both domestic and external debt.

Specifically, FG’s domestic debt servicing burden rose strongly by 45.6% to ₦312.8 billion from ₦214.8bn in the preceding year.

Similarly, external debt servicing cost increased 13.8% year on year to $287.0m from $252.3m in Q2:2019, reflecting multilateral and bilateral debt service obligations.

Given the devaluation of the official exchange rate, the increase in external debt service payments in local currency terms was stronger at 34.0% to ₦103.6 billion.

The increase in debt servicing burden suggests that FG’s debt service to revenue ratio would continue to worsen, especially given weak revenue growth and further currency devaluation to ₦381.00/$1.00 in Q3:2020.

“We highlight that the ratio increased to 72.2% as at May 2020 from 59.6% as at year-end 2019.

“This is unsurprising as our concerns about the devaluation impact of the aggressive binge in external loans since 2017 have been justified.

“We note that the share of external debt in total debt for the FG has now reached 38.9%, closer to the FG’s target of 40.0%”, Afrinvest stated.

Read More: Nigeria’s Public Debt Profile Escalates to ₦31trn in June, 2020

Funding Pressure to Ease as IMF, W/Bank Plan Debt Cut for Nigeria