Concerns as Nigeria’s Debt Burden Mounts

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Nigeria’s total public debt stock grew to N21.73 trillion at the end of 2017, representing 78 per cent increase in 30 months. Bamidele Famoofo notes that it seems the trend may not stop soon, as interest payment escalates

Nigeria’s total debt stock rose to N21.73 trillion by December 31, 2017, from N12.2 trillion in June 2015, a staggering 78.11 per cent increase. In six months only, from June 2017 to end of December 2017, the nation’s debt stock jumped by 10.6 per cent, from N19.67 trillion to N21.73 trillion.

The World Bank says the rate at which the debt portfolio of Africa’s second largest economy is rising is worrisome, as interest payment has been high. World Bank Lead Economist, Africa, Punam Chuhan-Pole, while making specific comments on Nigeria’s rising debt portfolio at the on-going World Bank meeting in Washington D.C on Wednesday, said, “Interest payment as a share of government revenue is quite high. It raises issue of sustainability.”

Although Chuhan-Pole acknowledged that the country’s debt remained low, going by the debt to Gross Domestic Product ratio, she said interest payment had been high.

Burden

Figures provided by the Debt Management Office (DMO) recently confirmed the fears of the World Bank, as the Nigerian government has spent a total of N3.72 trillion to service local debt in the past three years. According to DMO, the Federal Government spent a total of N1.48 trillion on actual debt servicing in 2017.

With a total of N1.23 trillion and N1.02 trillion spent in 2016 and 2015, respectively, on domestic debt servicing, these add to a total of N3.72 trillion spent on domestic debt servicing in the last three years.

 Government’s Strategy

But contrary to the position of the World Bank on the high interest on loan, the Minister of Finance, Mrs Kemi Adeosun, says there is nothing to fear about the rising debt. Adeosun said the Federal Government’s revenue and debt management strategy would mitigate the country’s debt service risk and fast-track development.

The minister, who welcomed the advice of Nigeria’s international development partners, including the International Monetary Fund, said the strategy would achieve a number of objectives. They include, according to the minister, mobilising revenue while reducing the debt burden by lengthening the maturity profile, increasing foreign exchange reserves, reducing crowding-out of the private sector, and creating savings in debt service cost.

Adeosun argued that a key element of the economic reform strategy was the mobilisation of revenue to improve the debt service to revenue ratio.

“This is being undertaken through a number of initiatives, including the plugging of leakages and the deployment of technology in revenue management,” she said.

Adeosun added, “The difference in our economic strategy is that we are changing the mix of revenue sources available to government from the traditional oil or debt to a combination of oil, debt and domestic revenue. This is a long term strategic reform which is critical to our future economic growth and in the short term will enable our debt service to revenue ratio to improve.”

In addition, the minister noted that the government was refinancing its inherited debt portfolio and this will lead to significant benefits, particularly a reduction in costs of funds.

The immediate past Director-General of DMO, Dr. Abraham Nwankwo, commenting on Nigeria’s public debt, said the domestic and external components were conditioned and governed by considerably different dynamics. “Indeed, it is pertinent to note that in spite of the drastic drop in the country’s foreign exchange earnings, following the oil-price shock since mid-2014, the external debt liability hardly constitutes a source of vulnerability,” Nwankwo stated.

Refinancing

The DMO has unveiled a plan to refinance the country’s debt. “The planned external financing of USD2.50 billion is for the refinancing of maturing domestic debt obligations of the Federal Government,” a statement from the DMO said.

DMO explained that the US$2.50 billion refinancing plan was not a new or incremental debt because it will not lead to an increase in the public debt stock.

“The purpose is to rebalance the federal government’s debt portfolio by increasing the external component while reducing the domestic component in line with Nigeria’s Debt Management Strategy, which has a target of a 40:60 ratio for external to domestic debt from the current position of about 25:75, respectively” DMO hinted.

The DMO explained that proceeds of the planned USD2.50 billion will be converted to Naira and used to redeem relatively more expensive domestic debt. This is expected to save about N64 billion per annum in interest cost which will help to reduce the Debt Service/Revenue ratio and free up the fiscal space for other priorities of government.

 “In December 2017, the government redeemed matured Nigerian Treasury Bills (NTBs) with proceeds of USD500 million Eurobonds issued in November 2017. Apart from saving about N17 billion per annum in debt service cost, there was also a significant drop in the Bid Rates at the Auctions of both NTBs and FGN Bonds in December 2017 and January 2018 from a range of 16 per cent to about 13.5 per cent,” DMO revealed.

 Moody’s

It would be recalled that global rating agency, Moody’s, downgraded Nigeria from a B1 stable to a B2 stable rating in 2017. This is equivalent to Nigeria’s existing B/Stable Outlook rating from S&P and slightly lower than Nigeria’s B+/Negative Outlook rating from Fitch.  But the key government agencies, which include the Central Bank of Nigeria, Federal Ministry of Finance, and the DMO, faulted the position of Moody’s. They noted that since Nigeria was last rated by Moody’s (as B1 stable) in December 2016, the country had successfully emerged from a protracted recession and recorded important improvements across a broad range of indices.

Growth Prospect

Despite Nigeria’s rising debt profile, IMF predicted a growth from 0.8 per cent in 2017 to 2.1 per cent by the end 2018, while warning of possible crash in crude oil prices. According to its latest World Economic Outlook (WEO) Report launched in Washington DC on Tuesday, the fund predicted that Nigeria would also grow by 1.9 per cent in 2019. IMF, however, advised oil-dependent economies, including Nigeria, to intensify economic diversification, saying it foresees the crash of crude oil prices in the near future.

A breakdown of the total indebtedness of both the federal and state governments in Africa’s most populous and second largest economy showed that domestic debt for the federal government was N12.59 trillion, while the domestic debt of states and the FCT was N3.35 trillion. The external debt of the federal government, states and the FCT was N5.79 trillion. The Total Public Debt as at December 31, 2017 was N21.73 trillion.