“Nigeria’s debt load unsustainable, govt to face crisis within five years”
Weak macroeconomic fundamentals and poor policies choices have failed to reflate the performance of the Nigeria’s economy, analysts have noted.
Investors general view is that key indicators are largely weak, from persistent bearish stock market performance to slow domestic economic growth among others.
With the burgeoning debt loads and steep interest rate on bonds; same time when macroeconomic condition remains unfavourable for domestic and foreign investors, experts think Federal Government of Nigeria may be faced with debt crisis.
An independent economic research company, Capital Economic reveals that Nigeria fiscal position is unsustainable and that the country will face some kind of debt crisis within five years.
The nation’s economic and fiscal data shows that FG is overspending its recurrent expenditure. Actual expenditure on wages outweighed budgeted, same happened to debt servicing as well as other recurrent spending except pension payments.
Capital Economic stated that Nigeria’s latest budget plan has strengthened its view that the fiscal position is unsustainable and that the country will face some kind of debt crisis within five years.
The firm noted that Nigeria’s new fiscal framework makes for sobering reading.
“The budget document not only admits that the FG didn’t manage to execute any new capital spending in the first half of 2019, it also finally abandons the president’s long-stated goal of raising capital spending.
“This is, on the face of it, bad news, though we doubt that the government was ever likely to actually meet these targets”, the research firm noted.
Furthermore, the research firm stated in the report that the government’s total debt pile is, admittedly, just 30% of gross domestic product (GDP).
At the end of the first quarter 2019, debt management office (DMO) said total debt profile of the nation settled at N24.95 trillion. Data on the country however reveals that Nigeria’s GDP size of $397.27 billion.
Minister of Finance, Zainab Ahmad, has occasionally defends the government on probability of potential debt crisis. Ahmad had stated that the nation’s debt stock is sustainable as it is within Fiscal Responsibility Act guideline.
In Deloitte, one of the global big four accounting firm, guide to fiscal information report, International Monetary Fund World Economic Outlook placed $444.92 billion as GDP estimate for 2019.
In its research report, Capital Economic observed that limited revenue – particularly non-oil revenue – means that servicing these debts gobbles up over 50% of the state’s fiscal resources.
“This share is likely to remain above-target, particularly given unrealistic official GDP growth forecasts”, it added.
MarketForces recalls that Institute of International Finance stated in a report stated that Nigeria is paying higher interest rate on Eurobonds issuance compare with peer countries with same credit rating.
The institute opened up that Nigeria paid as much as 6.5% on Eurobond issuance, and analysts think debt service cost may sink government programs.
Meanwhile, Capital Economic held that the key message of the report is that Nigeria’s debt load is unsustainable.
“The government’s total debt pile is, admittedly, just 30% of GDP. But limited revenue – particularly non-oil revenue – means that servicing these debts gobbles up over 50% of the state’s fiscal resources.
“This share is likely to remain above-target, particularly given unrealistic official GDP growth forecasts”, it added.
The firm however said that the only lasting solution to Nigeria’s debt problem is to boost government revenue, which is worth just 7% of GDP.
“But administrative weakness and political opposition will make this difficult. Indeed, modest plans to raise the value added tax VAT from 5.0% to 7.5% (still low by any standard) have aroused significant opposition.
“If revenues remain low, there are several unappealing options”, the report reads.
Capital Economic Research options include continues cutting non-debt spending, focusing limited resources on debt servicing.
“Given the new cuts to capital spending targets, this may be how officials intend to proceed. But this would come at the cost of social spending and vital investment.
Read: https://dmarketforces.com/nigeria-has-no-outstanding-debt-obligation-to-be-forgiven/
“Eventually, the federal government would become a glorified collections agency with no ability to enact meaningful policies. And even this may not be enough”, the firm stated.
The research company added that up to a point, the government can lean on local banks to buy up its debt. But this would crowd out lending to the private sector, which the central bank has already highlighted as a problem.
“As a last resort, Abuja could seek direct support from the central bank. Outright deficit monetisation would further tarnish the central bank’s credibility. It would also increase the money supply, putting further pressure on the exchange rate.
“The central bank would have to either enforce painful capital controls or allow the naira to weaken abruptly. There are, in short, several ways that Nigeria’s fiscal problems could unfold. But recent figures all strengthen our view that some sort of crisis is coming”, the report stated.
“Nigeria’s debt load unsustainable, govt to face crisis within five years”
