Official FX Rate Devaluation Raised Nigeria’s Debt to ₦28.6trn
President Muhammadu Buhari

Official FX Rate Devaluation Raised Nigeria’s Debt to ₦28.6trn

The National Bureau of Statistics stated that total public debt portfolio of the Federal and State Governments as of March 31 stood at ₦28.63 trillion from ₦27.4 trillion in December, 2019.

The increase was driven by devaluation of the exchange rate for translating external obligations to ₦361/$ from ₦326/$ as at year-end 2019 mainly drove the increase.

However, the nation’s debt is expected to increase significantly after accounting for coronavirus related borrowings.

Of the total public indebtedness, NBS showed that ₦9.99 trillion which represented 34.89% was external.

Official FX Rate Devaluation Raised Nigeria’s Debt to ₦28.6trn
President Muhammadu Buhari

It stated that the domestic borrowing was ₦18.64 trillion which represented 65.11% of the total indebtedness.

“States and Federal Capital Territory domestic borrowing was put at ₦4.11 trillion with Lagos State accounting for 10.8% of the total domestic debt stock.

In its macroeconomic note, Afrinvest, an investment banking firm, the increase has further put a dent on sustainability even without accounting for the impact of COVID-19 yet.

Nigeria’s total public loans as at Q1:2020 rose to ₦28.6 trillion or $79.3 billion from ₦27.4 trillion which was $79.4 billion as at year-end 2019.

At that level, debt to gross domestic product (GDP) ratio rose to 19.3% compare to 19% in 2019 based on annualised Q1 data.

Debt Sustainability Risk: Weak Revenue Collection Expands FG’s Deficit

Afrinvest stated that the devaluation of the exchange rate for translating external obligation to ₦361/$ from ₦326/$ as at year-end 2019 mainly drove the increase.

Hence, even though external loans by both the Federal Government (FG) & States remained unchanged at $27.7 billion, the naira value rose 10.7% to ₦10 trillion.

The FG’s domestic borrowing increased 1.4% to ₦14.5 trillion driven by a sustained expansion in promissory notes by 30.7% to ₦957.2 billion as part settlement for outstanding obligations.

The domestic component of FG’s debt service declined year on year to ₦609.1 billion in Q1:2020 from ₦610.2 billion, Afrinvest said it saw pressures from external debt servicing.

The external debt servicing cost rose 32.3% year on year to $472.6 million driven by a broad-based increase across commercial, multilateral and bilateral loans, Afrinvest explained.

In Naira terms, Afrinvest said this translated to an external servicing cost of ₦170.1 billion which was 55.1% higher than the corresponding period of 2019 due to the devaluation of the official exchange rate.

Given the currency effect, Afrinvest estimates that FG’s debt mix has improved to 36.5% for external debt from 34.4% in 2019, much closer to the 40% target.

Debt Sustainability amid the Revised 2020 Budget and 2021-2023 MTEF

Afrinvest explained that considering the revenue shock brought by COVID-19 and the resulting record fiscal deficit, the firm expects the FG’s debt sustainability to worsen in 2020.

The Q1:2020 data already provided insight into what to expect with debt service to revenue ratio at 99.2% for the FG.

Beyond Q1, there has been little improvement as revenue performance between January and May 2020 was ₦1.5 trillion, 44% lower than projections.

With a ₦301 billion increase in 2020 expenditure to ₦10.8 trillion to support Nigeria’s COVID-19 response, fiscal deficit is expected at ₦5 trillion in 2020.

This is 3.6% of GDP, which is beyond the 3% threshold established by the Fiscal Responsibility Act.

“We estimate that this would raise public debt to GDP to 24.6% from 19.0% in 2019”, Afrinvest explained.

Meanwhile, the 2021-2023 medium term expenditure framework (MTEF) also proposes aggressive borrowing plans as the fiscal deficit is expected to reach ₦5.2 trillion in 2021.

This is expected to be driven by revenue and expenditure projections of ₦7 trillion and ₦11.9 trillion respectively.

“Without measures to increase revenue and rein in spending through cuts to energy subsidies, we believe FG’s debt sustainability would deteriorate quickly”, Afrinvest stated.

Official FX Rate Devaluation Raised Nigeria’s Debt to ₦28.6trn