Growth-starved Nigeria's Economy Expends 83% of Revenue to Service Debts
President Muhammadu Buhari

Growth-starved Nigeria’s Economy Expends 83% of Revenue to Service Debts

Nigeria, a growth-starved economy, expends 83% of total revenue generated at the year-end 2020 to service the nation’s debt stock, analysts macroeconomic data has shown.

After two consecutive negative growth readings ushered in by the outbreak of coronavirus pandemic, Nigeria slipped into recession.

However, the International Monetary Fund, IMF, projected that in 2021, the nation’s economy will grow by 1.1%.

MarketForces Africa gathered that this is far below the rate of population growth, thus resulting to low per capital income in the year.

Some pundits believe that Nigeria needs double-digit growth to reduce endemic poverty, though government has been making efforts toward this direction via various intervention programmes.

Nigeria’s economy is powered by petrol-dollar hit the bottom with low revenue due to external influence that impacted productivity.

As a result, government resulted to borrowing to finance its budgets.

For the nation, debt to revenue ratio of 83% means for every ₦100 that was generated as revenue, FG committed ₦83 as interest payment on public debt.

Total public debt peaked at ₦32.22 trillion at the end of third quarter of fiscal year 2020, according to the nation’s Debt Management Office.

In January, $500 million Eurobond is due for repayment, Fitch Ratings however put the due date as 28th January 2021.

While DMO issue circular to raise about US$450 billion the first quarter, analysts said it is cheap for government to raise fund from domestic market.

In what analysts consider as a financial repressive, the Nigeria’s central bank dovish stance has kept interest rate in the fixed income market abysmally low.

Yields on government instruments has remained relatively low amidst robust financial system liquidity but inflation rate has been on uptrend.

After rising for 16months consecutively, Nigeria’s headline inflation rate peaked at 15.75% in December, 2020.

In its macroeconomic note, Greenwich Merchant Banking group explained that a myriad of negative events ranging from the oil price shock to the global pandemic overwhelmed the economy.

Thereby, the development had mandated a review of the budget spending and its assumptions.

The essence of 2020 budget review was to cater for additional expenditure plans like the Covid-19 crisis intervention fund at ₦288.02 billion.

This also include other notable expansion along the lines of Debt service (+8.98%), and Recurrent expenditure (+2.07%).

Nonetheless, analysts understand that this was countered by the reduction in statutory transfers that was reduced by 23.63%, and 3.52% decline in capital expenditure.

Greenwich said, as it turns out, the much-needed amendments and the adverse effect of the Covid-19 pandemic on economic activities slowed government spending.

Over the year, the report stated that the FG’s retained revenue came in at ₦3.94 trillion.

This translated to a 27% shortfall relative to the budget target of ₦5.36 trillion in 2020.

At the same time, actual revenue came weaker than ₦4.54 trillion achieved in 2019, due to underwhelming performance of the oil market.

Noteworthy, was the oil sector performance which outpaced the budgeted figure of ₦1.01 trillion by 157% to settle at ₦1.52 trillion by year-end.

“This accounted for 38.7% of total retained revenue by the government in the period”, analysts at Greenwich stated.

“We attribute this uptick to a low base effect, with budgeted oil prices and oil production pegged at USD28 per barrel and 1.80 million barrel per day (Mbpd) compared to the actual values of USD43 per barrel and production volume of 1.79 mbpd”, Greenwich stated.

Meanwhile, at ₦2.42 trillion, analysts noted that the non-oil sector, achieved 79% of its revised target, as against ₦3.83 trillion generated in 2019.

Greenwich thinks FG was not deterred by the constrained revenue, as the government expenditure increased by 1.10% to ₦10.08 trillion.

This was attributed primarily to change recorded around loan book as debt service rose by 10.63%.

In contrast, analysts review stated that capital spending remained lower than its target, with actual expenditure marking 11% shortfall due to the limited oil revenues and the delayed disbursements of project funds.

Ultimately, the country’s deficit stood at a whopping ₦6.14 trillion, far above the projected deficit of ₦4.98 trillion.

On a broader view, Greenwich however noted that the global pandemic held back major implementation of the budget’s capital components.

“We expect the recent extension given till the end of this quarter, should give ample time to fund earmarked projects, which invariably stimulates economic activities and boosts growth”, the firm stated.

Still, the country’s Debt-to-GDP pegs at 19.44% which is well below the World Bank/IMF threshold of 56% for countries in Nigeria’s peer group, and 25% as stipulated by the Fiscal Responsibility Act, 2007.

Analysts at Greenwich said more concerning was the debt service to revenue ratio which stands at an unsettling 82.8% as of year-end.

“We see this figure as being quite unsustainable and urge the government to pursue other avenues to diversify its earnings or rather reduce non-debt recurrent expenditure as well as its overdependence on government-owned enterprises.

“For 2021, we believe the advent of positive news inflow stemming from widespread vaccinations, the undersupplied crude market, and growing demand linked to an acceleration in economic activities should keep oil prices above the budgeted figure of $40”, Greenwich noted.

However, analysts hinted that downside risks associated with the prolonged roll outs of vaccines could weigh on the recovery in oil prices.

Analysts note reads that growth in the non-oil sector would be helped by quicker vaccinations, amidst a pick-up in economic activities.

“Though, we still do not expect the economy to waver out of a recession until the end of the second quarter, given the overdependence on revenue”, Greenwich posited.

In addition, the firm stated that weak public investments, alongside limited foreign direct investments leave barely any room for fiscal consolidation.

It said while the government requires a funding plug of ₦5.60 trillion, weak investor sentiment could upscale the premium demanded by foreign investors, thus increasing its borrowing costs.

Read Also: Nigeria’s Debts Rise ₦19tn in 5 Years as FCY Loan Gulps ₦109bn in Q2

Growth-starved Nigeria’s Economy Expends 83% of Revenue to Service Debts

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