Nigeria on Brink of New Debt Trap, Analysts Warn

Nigeria on Brink of New Debt Trap, Analysts Warn

If the nation’s debt continues to grow at the current pace over the next two years, Nigeria is on a brink of new debt trap, GTI Securities Limited analysts led by Damilare Asimiyu said in a macroeconomic note.

In the last five years, the nation’s debts has expanded more than ₦20 trillion as foreign currency loan gulps ₦109 billion in the second quarter of 2020.

To service external debt portion, between April and June, 2020 Federal Government expended a total sum of $USD287.043 million, according to Debt Management Office (DMO).

This translates to ₦108.879 billion between April and June (exactly 5 years into the new administration) if converted at the CBN’s official exchange rate of ₦379 to a dollar.

In its macroeconomic note, GTI Securities projected that Nigeria’s debt-to-real gross domestic ratio could cross 50% in 2021.

The petrol-dollar powered economy has seen declined revenue in the year due to uncertainty in the domestic and global economic environment.

As a result, Nigerian government has been on borrowing spree, claiming the funds access are to finance capital expenditure plan.

This has been putting pressure on budget plan year on year as some 25% have been earmarked for debt service cost.

Due to lower oil price, and minimal volume supply of crude oil, Federal Government plunged strongly while the apex bank struggles to stimulate growth.

In the second quarter of 2020, Nigeria’s gross domestic products went south 6.1% following longer period of inactivities necessitated by covid-19.

Pundits said COVID-19 handed the government veritable alibi for inefficient management and deployment of the nation’s resources.

Major macroeconomic indices indicate all has not been well for the nation following steep rise inflation and unemployment rate, as misery index widened.

If borrowing continues in the spate in the next two year, GTI Securities Limited analyst Damilare Asimiyu estimated a scary 50% debt to real GDP ratio for the nation.

Recalled that Nigeria’s Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, during her presentation on the proposed 2021 federal budget to members of the House of Representatives hinted that Nigeria’s total debt burden (domestic & external) which currently stands at ₦31.009 trillion will increased to ₦32.51 trillion by year-end.

However, the finance minister indicated that debt will rise further to ₦38.68 trillion by end of December 2021.

By implication, Asimiyu said this suggests that an estimated ₦1.50 trillion will be added to the nation’s debt stock before the end of the year.

Also, a fresh ₦6.17 trillion will be borrowed in 2021 to finance different components of the ₦13.08 trillion budget, owing to the perennial problem of revenue underperformance, buoyed by the negative impact of COVID-19.

Interestingly, GTI’s analyst said ₦6.17 trillion earmarked for borrowing by the minister in 2021 now represents an increase of 18.65% (that is ₦970 billion) when compared to the deficit figure of ₦5.20 trillion presented by the President Muhammadu Buhari during the 2021 budget presentation to a joint session of the national assembly barely a month ago.

In its communique issue, Central Bank of Nigeria’s Monetary Policy Committee had noted the rising public debt profile and urged the fiscal authority to strengthen its debt management strategy, explore other sources of revenue, as well as enhance efficiency in public expenditure.

Asimiyu said although all the proposition contained in the 2021 budget documents are subject to the approval/review by the national assembly, there are strong indications that Nigeria’s debt-to-real GDP ratio may cross the 50% mark by 2021, as a result of the faster rate of growth of the nation’s debt profile.

Analysis of Nigeria’s real GDP (nominal GDP less inflation effect) and total debt figures since 2015 shows that Nigeria’s Debt-to-real GDP stood at 38% in 2019.

GTI said this implies that about 38% of all the monetary value of economic activities that took place in Nigeria in 2019 is what will be required to pay off the nation’s total debt if the debts were to be paid as of December 31, 2019.

“With Nigeria economy expected to contract by a minimum of 4% in 2020 according to the International Monetary Fund due to negative impact of the COVID-19 pandemic and low earnings from crude oil sales.

“We estimate that Nigeria’s real GDP in 2020 will likely settle around ₦69.21 trillion.

“This implies that the nation’s Debt-to-real GDP figure will increase to 47% given the debt estimate ₦32.51 trillion by the end of 2020, as projected by the minister”, GTI analyst said.

Also, with Nigeria’s GDP estimated to only grow by 1.7% in 2021 according to the World Bank, GTI Securities estimate that the real GDP will print around ₦70.39 trillion in 2021.

Hence, Asimiyu said given the Finance minister’s projected size of Nigeria’s debt by the end of 2021, this will translates to a Debt-to-real GDP ratio of 55% by the end of 2021.

In addition, Nigeria Debt-to-Actual Revenue – budgeted revenue that was actually realized- which printed at 5.96:1 (or 596% above revenue) in 2019 is likely to increase to 916% in 2020.

Prorating the ₦1.4 trillion earned as of the end of May 2020 to give ₦3.55 trillion by December, before dropping slightly to 8.72:1 (or 872%) in 2021 assuming actual revenue collected increased by 25% in 2021 to ₦4.4 trillion.

“In all, our analysis revealed that Nigeria is on the brinks of a new debt trap, if nation’s debt continues to grow at the current pace over the next two years”, GTI Securities stated.

Monetary Policy Recognised the Issue:

In its communique published on CBN website, the Monetary Policy Committee stated that at present, fiscal policy is constrained and so cannot, on its own lift the economy out of contraction or recession given the paucity of funds arising from weak revenue base, current low crude oil prices; lack of fiscal buffers and high burden of debt services.

“This is the reason MPC will continue to play a dominant role in the achievement of the goals of the Economic Sustainability Program (ESP) through its interventionist role to navigate the country towards a direction that will boost output growth and moderate the level of inflation”, CBN says in a report.

MPC member, Adenikinju Adeola Festus in a submission at the meeting stated that the fiscal system continues to pose significant challenges arising from current underperformance of government revenue, unrestraint growth in government recurrent expenditure, underperformance of capital expenditure and rising debt service ratio.

According to Adenikinju, debt service rate rose to 84.1% of government revenue between January and August 2020 compared to 51.5% in January to August of 2019.

Adenikinju said, “Covid-19 has brought contraction in aggregate demand and aggregate Supply due to its direct effects as well as public policy put in place to control its spread in the economy.

“Unemployment as well as income cuts and impacts of lockdown have direct effects on nominal income.

“The rising inflation rate and increase in energy prices have impacted negatively on real incomes”.

Nigeria on Brink of New Debt Trap, Analysts Warn

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