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 fiscal 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 the coronavirus pandemic, Nigeria slipped into recession on account of declined productive activities across sectors. Analysts said the virus spread has provided the Nigerian government with a veritable alibi for non-performance.
The International Monetary Fund, IMF, projected that in 2021, the nation’s economy will grow by 1.1%, an expectation that is far below the rate of population growth, resulting in a low per capita income in the year.
Some pundits believe that Nigeria needs double-digit growth to reduce endemic poverty, though the government has been making efforts toward this direction via various intervention programmes.
Nigeria’s economy is powered by sales of petrol and other related hydrocarbon hits the bottom with low revenue due to external influence that impacted productivity. The slippage forced Abija to borrow to finance its budget.
For the nation, a debt-to-revenue ratio of 83% means for every ₦100 that was generated as revenue. In other words, FG committed ₦83 as interest payment on public debt while capital projects lie unfunded.
Following pressures on revenue receipts, total public debt peaked at ₦32.22 trillion at the end of the third quarter of the fiscal year 2020, according to the nation’s Debt Management Office.
In January, a $500 million Eurobond is due for repayment, Fitch Ratings however put the due date as 28th January 2021. In a circular, DMO indicates the need to access US$450 billion in the first quarter.
Economists and market analysts said it is cheap for the government to raise funds from the domestic market amidst low rates on debt instruments across tenored in the local debt capital market. Nigeria’s central bank’s dovish stance has kept interest rates in the fixed income market abysmally low.
Yields on government instruments have remained relatively low amidst robust financial system liquidity but the inflation rate has been on an uptrend. After rising for 16 months 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 mandated a review of the budget spending and its assumptions.
The essence of the 2020 budget review was to cater for additional expenditure plans like the Covid-19 crisis intervention fund at ₦288.02 billion. This also includes other notable expansions 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 which was reduced by 23.63%, and a 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 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 the 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 barrels 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 books 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 rollouts 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.
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