…FG borrows N4.5 trn, repays N2trn …Debt servicing ratio hits the roof …Currency depreciation adds to the inferno …Reducing cost of governance a must-Analysts
Nigeria’s public debt inched closer rose to N30 trillion following net borrowing of N2.3 trillion by the Federal Government (FG) in the first half of 2020 (H1’20), indicating more budgetary spending for debt service and reduction in funding to provide health, education, roads and other social services and infrastructure for Nigerians. The FG spend N609 billion for debt service in the first quarter of the year (Q1’2020). This is N209 billion or 53 percent higher than the N392 billion devoted to capital expenditure for Education, Health and Works ministries in the Revised Budget 2020.
The further increase in debt stock also increases the risk of another downgrade in the country’s credit rating by global rating agencies, which means Nigeria and Nigerian firms will pay higher interest rate to access loans from the Eurobond market, thus further compounding the debt service payment woes of the Federal government. The Federal Government spent N263 billion to service Eurobond loans in Q1’2020, higher than the N126.6 billion allocated for capital expenditure for the health and education ministries in the Revised Budget 2020. Borrowing in H1’20 Data on FG’s borrowing profile from the Debt Management Office (DMO), Central Bank of Nigeria (CBN), the World Bank and the International Monetary Fund (IMF), showed that the FG borrowed N4.445 trillion and repaid N2.014 trillion matured loans in H1’2020, leading to net borrowing of N2.43 trillion for the six months period. This figure is about 58 percent of the N4.17 trillion planned as new borrowings for the entire year in the revised Budget 2020. The N2.43 trillion net borrowing raised the total public debt by 16 percent, year-on-year (YoY) to N29.83 trillion from N25.7 trillion in H1’2019. It also represents an 8.8 percent increase when compared with total public debt of N27.3 trillion at the end of December 2019. Further breakdown showed that the FG borrowed N2.945 trillion from the domestic market comprising, N1.37 trillion through FGN Bonds, N1.57 trillion through Treasury Bills, N162 billion through Sukuk Bonds and N2.3 billion through the FGN Savings Bonds.
The debt repaid by the FG during the six months period includes N600 billion worth of matured FGN Bonds and N1.414 trillion worth of matured Treasury Bills. In addition to the domestic borrowing, the FG borrowed N1.49 trillion from the IMF and the World Bank. This comprises the $3.4 billion Rapid Support Facility (RSF) granted by IMF to Nigeria in April and the $750 million loan granted by the World Bank in June to support the nation’s power sector. Recent credit rating downgrade From December last year to April this year, Nigeria suffered three downgrades in its credit rating by three leading global sovereign rating agencies, which cited weakening government finances, worsened by a high debt service-to-revenue ratio due to soaring public debt levels. The downgrades came from Moody’s Rating, Standard and Poors as well as Fitch Ratings. Data from DMO showed debt service payment of N609 billion in Q1’20, indicating debt-to-revenue ratio of 99 percent, alarmingly higher than the 23 percent standard recommended by the World Bank and IMF. In December Moody’s Rating Company downgraded Nigeria’s rating to ‘Negative Outlook’ from ‘Stable Outlook’. It was followed by Standard and Poors on March 26th, which downgraded Nigeria’s credit rating into ‘junk’ territory with a B- rating, down from ‘B/B,’ due to the plunge in oil prices. Fitch Ratings followed on April 5th, downgrading Nigeria to ‘B’ from ‘B+, with ‘Outlook negative’. These downgrades in credit risks give signal to investors around the world of the increasing risk of investing in Nigeria or in debt instruments issued by Nigeria. Thus investors would demand a higher interest rate for investment in Nigeria’s Eurobond, and hence further increase debt servicing obligations. With the public debt touching the N30 trillion mark and debt servicing ratio likely surpassing the 99 percent level attained in the first quarter of the year (Q1’20), the country may suffer another round of downgrade of its rating by the rating agencies. Threat to economy Consequently analysts warn that the country’s rising debt level poses a major threat to the economy especially future infrastructure development, and hence should be a source of concern to the public policy executives. Director General, Lagos Chamber of Commerce and Industry, LCCI) Dr. Muda Yusuf said: “The growing national debt is a cause for concern as the debt profile grew from N12.6 trillion in 2015 to N27.4 trillion as at December 2019, an increase of 117 percent.” Speaking on the impact of the huge public debt on government finance, Yusuf stated: “The capacity to service the current stock of debt raises serious sustainability concerns. For instance, the debt service provision in the 2019 budget was a whooping N2 trillion; whereas the total capital budget was N2.9 trillion; this implies that the debt service commitment was 70 percent of capital budget allocation. “Only recently, the National Assembly approved the revised 2020 budget of N10.8 trillion. The recurrent component is N4.9 trillion, which is 45.4 percent. The capital component is N2.49 trillion, which is 23 percent of the budget. The debt service component is N2.95 trillion, which is 27.3 percent. It follows that the sum of the recurrent provision and the debt service provision represents 73 percent of the budget.
“With the plunge in revenue, the capacity to fund both the recurrent and debt service will be severely challenged. This would also put capital project funding at a greater risk. “The opportunity costs of high debt service commitment for the economy and citizens are very high as the economy is denied funding for critical infrastructure projects which are needed to build a globally competitive economy. “There is also the exchange rate risk inherent in the exposure to mounting foreign debt which we need to worry about. “As the currency depreciates, the burden of servicing foreign debt would intensify, especially when productivity in the economy remains low. This is a major problem with increasing the stock of foreign debt.” Debt ratio hits roof— Adedokun Also expressing concerns over the nation’s rising debt stock, Dr. Adebayo Adedokun, Department of Economics, University of Lagos said: “The issue of rising debt profile and it’s attendant implication on costs of debt servicing should be a matter of concern to all Nigerians including an average man in the streets. Explaining further, he stated: “Theoretically, there are different measures used to adjudged a country’s debt sustainability, chiefly among them are debt to GDP ratio and debt service to Government Total Revenue ratio. If you look at the first criteria, Debt to GDP in Nigeria is about 30 percent, which gives a moderate position of how sustainable debts are in Nigeria, this also encourages FGN to seek more debt. “But the second measure which is debt service to revenue as reported for the first quarter of 2020 is alarming, it is reported by the medium term expenditure framework and fiscal strategy by the federal ministry of finance to be 99 percent, the meaning of this is that, out of every 100 kobo earned by the FG within the period, 99 kobo is used to pay charges on debt while the principal will still be paid as at when due. “The recommended position in World Bank and IMF framework for debt sustainability for low income countries is 23 percent, this is unsustainable for Nigeria no matter the alibi of dwindling oil revenue and COVID 19. “There will be a negative impact of this on infrastructural development, social services, and budget performance in all other productive sectors of the economy. This may likely move Nigeria status to highly indebted poor countries (HIPC), reducing our credit worthiness as a nation. Domestic debt borrowing can easily crowd out private sector borrowing, and this will be a hindrance for private sector led growth post COVID 19.” Limited options funding – Afrinvest Also warning about the negative consequences of the rising public debt, Managing Director/Chief Executive, Afrinvest Securities Limited, Ayodeji Ebo, said: “The debt service burden has reached an unsustainable level based on the first quarter budget performance where about 99 percent of revenue was used to service debt. “The implication is dire, meaning most of the borrowings has been channeled into non debt recurrent expenditure with little allocated to capital expenditure. “More concerning is the second quarter revenue which was significantly impacted by COVID-19 pandemic. “While there are limited options for funding, deliberate effort should be made toward directing more borrowed funds into more productive areas due to the multiplier effect on GDP.” Little room for capital expenditure — FPI Capital On his part, Abdulazeez Kuranga, research and investment analyst with FPI Capital Limited, said while the rise in public debt in H1’20 was due to negative impact COVID-19 has had on FG’s fiscal operations, it however, implies that the FG is borrowing to run its daily operations. He stated: “The rising debt level also has an implication of increasing debt service to revenue ratio of the country. In Q1’20, this ratio was 99.22 percent which simply means that for every 100 naira the FG earns, it uses 99 naira to service its debt obligations. This indicates the government is borrowing to run its daily operations and will give little room for capital expenditure and further widen the infrastructural deficit of the country.” Debt reduction strategy – Analysts Speaking on how to arrest the rising trend in the nation’s public debt, the analysts stressed the need for the government to cut costs and allow private sector funding of capital projects. Speaking in this regard, Ayo Akinwunmi, Senior Relationship Manager, Corporate Banking, FSDH Merchant Bank, said: “ What the Nigerian governments, at all levels, need to do going forward is to rethink their revenue generation models and develop strategies that can ensure that they build broad base revenue streams to cope with the rising costs. “The government also needs to remove from its list the projects that the private sector can provide in order to reduce costs and drive efficiency while opening up other sectors of the economy that can generate income like solid Mineral development, crude oil refining etc.” Dr. Yusuf also stated: “All these underline the imperative of reforms to reduce recurrent expenditure, especially the cost of governance. It is critical as well to ensure appropriate policy choices to attract equity domestic and foreign private sector capital for economic and social infrastructure financing.” In addition to the reducing cost of governance, Dr Adedokun also stressed the need to pursue debt renegotiation. He said, “Nigeria should renegotiate the terms and conditions of some of our debts, we can ask for debt forgiveness, rescheduling, reductions of charges occasioned by global pandemics perhaps, our creditors may have compassion on us in the spirit of facing global emergency. “All the same, the wisdom in the holy book is supreme, the Bible says, the borrower will always be a servant to the lender, we can reduce the effects of oil price volatility by developing the agricultural sector, the mining sector, manufacturing sector and the service sector, we needed to get our security apparatus right and make Nigeria a safe destination for foreign direct investments, no one will like to come to Nigeria for tourism in spite of several UN sites located in Nigeria because of insecurity of their lives and property. “In the 70s and 80s we used to hear of Yankari game reserves, Igokosi waterfalls, Badagry slave museums, Ero Omola waterfalls, and several tourist locations in Plateau State. But who will like to visit these places today? It is either you will be a victim of Boko Haram, or Fulani herdsmen, or kidnappers, or armed bandits, or armed robbers. If we take this seriously, the service sector alone can finance Nigerian economy just like oil.”