Diversify Revenue Base to Avert Debt Crisis, FG Urged

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Obinna Chima
The federal government has been advised to further diversify the country’s revenue base or start reducing the level of its debt by rapidly selling some national assets, in order to avert a debt crisis in the medium term.

Analysts at Afrinvest West Africa Limited gave the advice in a report. However, they stressed that they do not expect a debt crisis in the near term.

Since the start of a prolonged global oil price drop in the second half of 2014, the Nigerian economy has recorded a significant downturn in performance as plummeting government revenues and the resultant FX crisis dragged the economy into its first recession in 25 years.

The Debt Management Office (DMO) recently revealed that Nigeria’s total debt stock increased to N19.15 trillion at the end of first quarter 2017, from the N17.36 trillion at the end of last year. The federal government also raised the sum of $300million through the issuance of diaspora bond recently. Beside the diaspora bond, the DMO had disclosed that arrangement has been concluded for the issuance of the first sovereign sukuk, otherwise known as Islamic Bond or non-interest bond which closed at the end of last month -N100billion to fund road projects. Also, in line with the government’s borrowing plan, there is an outstanding issue of a US$64 million Green Bond.

Multilateral loans were sought from the AFDB (US$646.6million) in addition to bi-lateral loans from the China EXIM Bank, France AFD and Japan JICA. Following improvements in domestic investment landscape at the turn of the year, Nigeria returned to the International capital market after a three-year hiatus, successfully raising US$1.5 billion via Eurobonds this year.

On the domestic front, the DMO has continued with its monthly bond auctions and took it a step further by introducing atypical bonds such as the Savings Bond.
But, Afrinvest in the report pointed out that the country’s 2017 budget projected another record expenditure year, with fiscal deficit estimated at N2.4 trillion – domestic borrowing accounting for 53 per cent (N1.3trillion) of the total while foreign borrowing was projected at N1.1 trillion.

“The rising debt profile is not surprising given the widening budget deficit and large depreciation of the naira; however, the cost of servicing the mounting obligations took up more than 60 per cent of revenue in the first half of 2016 and has become a major source of concern on debt sustainability.

“The major argument for increased deficit spending is that the economy is underleveraged with a debt to GDP ratio of 20 per cent but also hard to ignore is the offsetting low non-oil revenue to GDP ratio. Nigeria’s Tax/GDP ratio is six per cent, which is relatively low when compared to Sub-Saharan Africa peers – South Africa (26.2%) and Kenya (15.4%),” the report added.

It noted that the nation’s tax collection and administration system was still deemed inefficient with multiple tax system and a high tax evasion and avoidance rate. According to the report, despite the recent drive to increase tax revenue, not much has changed in terms of actual results.
In fact, federally collected Non-oil revenue fell 4.4 per cent in 2016 to N3 trillion.
“To their credit, fiscal authorities have doubled down on tax reforms including the recently launched Voluntary Asset and Income Declaration Scheme (VAIDS) which grants taxpayers a time-limited opportunity to regularise their tax status without penalty.

“However, with the economy challenged, the odds of significantly boosting tax revenue in the near term is slim and we expect budget deficits to remain high for the next two to three years. What does this imply for medium term debt sustainability? Our opinion on this is a bit nuanced. The structure of Nigeria’s public debt is heavily tilted towards the domestic market (up to 77.9% of aggregate debt) and this easier to deal with in the event of a credit crisis.
“Foreign debt obligations are also mostly multilateral and bilateral in nature (78.0% of total foreign debts) which are typically long tenured and granted at concessionary rate. Thus, we do not expect a debt crisis in the near term but policymakers will need to further diversify revenue base or start deleveraging to avert one in the medium term,” they added.