Rising Fiscal Deficit, Weak Naira Fuel Nigeria’s Debt Burden –Analysts
President Muhammadu Buhari

Rising Fiscal Deficit, Weak Naira Fuel Nigeria’s Debt Burden –Analysts

Pandemic-induced fiscal deficit and devaluation of the local currency, Naira, fuel higher debt burden, a leading investment banking firm, Afrinvest, said in a new report while reacting to Nigeria’s rising debt book.

Official calculation recorded that debt-service costs rose 15.4% to ₦2.4 trillion amidst massive borrowings as government revenue fell significantly in 2020.

Low revenue generated in the period created gap in recurrent and capital expenditure financing amidst quest to douse impacts of covid-19 on the economy, resulting to sizeable stimulus offerings.

Nigeria rely heavily on foreign receipts from oil export but the petrol-dollar powered economy suffered low revenue generation in 2020 due to inflow as oil prices plunged.

The trend is reversing as oil recently hit sky-high level, crossing $70 per barrel before it receded, currently trading above $64 per barrel.

Historically, oil price level has always determine Nigeria’s gross domestic products (GDP) growth trajectory, getting strong when oil prices surge and hit the iceberg when oil stays low.

In 2020 debt report, data shows that Nigeria’s rising debt profile resulted to higher interest obligations which resulted to worsening debt service-to-revenue to 62.2% from 50.7% in 2019.

Analysts interpret this to mean that Nigeria committed N62.2 kobo out of every N100 generated in 2020 to meet interest payments obligations on borrowed funds.

This was higher when compare with N50.7 committed to finance debt stock obligations in the comparable period in 2019, casting aspersion on debt sustainability in a growth-starved economy.

Nigeria’s debt report recently published by the Debt Management Office (DMO) revealed a 20.1% rise in Nigeria’s public debt stock to ₦32.9 trillion.

Amidst rising fiscal deficit, DMO hinted that Federal Government of Nigeria recorded a 23.4% increase in debt burden to ₦26.9 trillion as at 2020 year-end.

Afrinvest said the current debt amount implies a Debt-to-GDP ratio of 21.6% for 2020 from 18.8% in 2019 using 2020 nominal gross domestic figure GDP figure.

The investment firm posited that the expansion in debt reflects the devaluation in the domestic currency by 19.3% from ₦306.00/$1.00 to ₦379.00/$1.00 at the CBN official window by the end of 2020.

In addition, it said the increased borrowing during the year as the Federal Government obtained $3.5 billion multilateral financing from the International Monetary Fund, $1.4 billion from World Bank and $307.1 million to plug the pandemic-induced fiscal deficit also fueled the rise in debt.

Hence, external debt burden for both FG and States surged 40.8% to ₦12.7 trillion or $33.3 billion and the external debt for FG alone spiked 44.5% to ₦10.9 trillion or $28.5 billion.

Analysts stated that FG also increased domestic borrowing by 12.3% year on year to ₦16.0 trillion, leveraging the low-yield environment as borrowings via bonds, promissory notes and Sukuk bonds increased by 12.4%, 32.6% and 81.3% respectively in 2020.

Afrinvest said although debt-to-GDP remains below the threshold advised by the IMF, debt-servicing costs paints a different picture, especially when compared with the weak level of government revenue.

It was noted that Nigerian debt-service costs rose 15.4% to ₦2.4 trillion and debt service-to-revenue worsened to 62.2% from 50.7% in 2019.

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Similarly, external debt-servicing costs rose by 16.7% to $1.6 billion due to increase in multi-lateral and bi-lateral financing. The weakness in the domestic currency however drove a faster rise of 36.4% to ₦592.9 billion in Naira terms.

Domestic debt-servicing costs also increased 10.0% year on year to ₦1.9 trillion from ₦1.7 trillion reported in 2019.

In terms of debt composition, external debt represented 40.5% of total FG’s debt in 2020, above FG’s target of 40.0% as external debt rose faster due to the aforementioned factors.

“Looking ahead, we do not expect increased significant external borrowings in 2021 as the FG’s target for debt composition has been changed to 70:30 in the 2020-2023 medium term expenditure framework (MTEF).

“Estimated service costs of existing Eurobonds in 2021 totaling about $806.3m and still-low yields in the domestic bonds market.

“We expect the FG to continue feasting on the low-yield environment to bridge its financing gap in 2021 in order to align with the new debt mix target. We anticipate debt service-to-revenue to remain worse due to low revenue collection and currency weaknesses”, Afrinvest said in the report.

Public Debt Analysis

According to official calculations, some 61.4% was made up of domestic debt and the remaining 38.6% in the form of external liabilities. Of the latter, 54% was in the form of multilateral debt, 12% bilateral debt, and 34% sourced from commercial lenders.

NKC African Economic said in a review that commercial external debt as a proportion of total external debt has more than doubled over the past four years, from around 13% in 2016 to the current figure of just over 34%.

In turn, public external debt as a proportion of GDP has increased from under 2% in 2016 to just over 8% last year. Official calculations of the government debt burden use the official exchange rate of N381/$ when converting foreign debt into naira terms.

NKC  said when using the Nigerian Autonomous Foreign Exchange (NAFEX) rate of N400/$ at the end of 2020, the overall debt burden rises to N33.5 trillion, which is 1.9% higher than the official figure.

“In turn, when using the parallel market rate of N468/$ presiding at the end of last year, the debt burden increases to N35.8trn – nearly 9% higher than the official figure”, the firm added.

“Going by recent statements, the finance ministry and central bank are not on the same page when it comes to the country’s exchange rate policy.

“This complicates the public debt assessment. For instance, if the NAFEX rate will be used for certain government transactions, as the finance ministry has stated, oil revenue could be converted into naira at the current NAFEX  rate of around N408/$ instead of the official rate of N380/$, which would boost revenue.

“In turn, if there has been no change to the exchange rate regime, as communicated by the central bank, the debt burden is lower and external interest payments more affordable.

“While the aforementioned scenarios would both benefit government finances, the fact that there is uncertainty over which scenarios will materialise does not instil confidence in the country’s fiscal position”, NKC Economics said.

Rising Fiscal Deficit, Weak Naira Fuel Nigeria’s Debt Burden –Analysts