Nigeria's Debt Worrisome as Pandemic Bites Harder-Analysts Fear Second Wave Decline


Monday, November 09, 2020, / 11:00 AM / by Adesola Brokinni and Kehinde Oyinleye Proshare Research /Header Image Credit: Ecographics


Nigeria's dwindling oil revenue and rising debt profile have caused growing concern amongst local economists. According to data from the Debt Management Office (DMO). Nigeria's total debt as of H1 2020 stood at N31.01trn from N12.6trn as of 2015. Nigeria's debt increased by +146.1% in H1 2020 from N12.6trn in 2015. Nigeria's debt to revenue ratio as of Q1 2020 was 99% in other words of the N950.56 billion retained revenue of the Federal Government, N943.13 billion was used to service debt, although this improved slightly in May 2020 as the debt-to-revenue ratio dropped to 72%


Analysts note that Nigeria has a Eurobond issue of over US$500m maturing January 2021 making it necessary to choose between either redeeming or refinancing the debt, whichever decision made has deep implications for the country's debt structure (see Chart 1).


Chart 1: Nigeria's Total Debt (N'trn)

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Source: DMO, Proshare Research


Nigeria's ballooning debt profile is a major source of worry for the economy and its fiscal stability. The emergence of the COVID-19 pandemic has worsened Nigeria's rising debt profile. A recent report released by an international rating agency, Fitch, that although Nigeria's economic outlook has been upgraded to stable, its new investment grade of B is not an investment grade. A rising debt profile with no clear viable outlook regarding revenue is of major concern.


A breakdown of Nigeria's budget reveals that its planned fiscal deficit for the 2021 fiscal year was N5.2trn approximately 3.64% of GDP, which is above the 3% threshold set by the Federal Fiscal Responsibility Act (FRA), the increase above the regulated requirement was explained by the economic difficulties attributed to COVID-19 health pandemic. The deficit finance would likely come from new borrowings, privatization proceeds, and drawdown on loans secured for projects. Also included in the budget were new borrowings (domestic and foreign) of N4.28trn and debt service of about N2.9trn. Nigeria's 2021 budget would be largely financed by loans that pose concern for potential investors as Nigeria's debt-to-revenue ratio remains high (see Table 1).

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Table 1: Nigeria's 2021 Budget

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Nigeria's government recently embarked on the deregulation of the oil and power sector to ease its lean budget from fiscal pressure. But this may not achieve much as the huge cost of sustaining the size of government and contemporary democratic apparatuses make a cut in expenses near impossible.

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The Web of Challenges Ahead

Local economists observe that public debts are not necessarily bad as more advanced economies like the US, Germany, and China are presently highly indebted, however, debts of these mature economies appear to be better managed.


Analysts note that public debts channelled towards capital expenditure tend to have greater multiplier effects on economic growth. In the budget for 2021, capital expenditure was N3.85trn (29.4% of total expenditure) while recurrent non-debt expenditure was N5.65trn.  To gear the budget towards growth the government would the year's capital expenditure outlay in the face of a COVID-19-induced economic pullback.


Is recurrent expenditure problematic? Maybe not. But a high recurrent budget line relative to capital provisions would lead to a slower than desired growth of national output or GDP.


Capital projects in Nigeria have been with concerns bordering on the weak value creation opportunities that emerge from budgetary spending; the main issues centre on, what are the true costs of these projects? who are the main beneficiaries? what is the economic value of the projects? What are the skills, and sources of project inputs? What are the terms of loan repayments? What are the sources of loan repayment?


A continuous surge in Nigeria's debt without a robust debt repayment architecture which would include accountability and the proper use of borrowed funds could create a debt web that strings up the economy.


A consistent rise in Nigeria's debt without viable repayment options could lead to a reduction in the inflow of FDIs & FPIs, thereby worsening credit ratings, unemployment, national misery index, and domestic productivity.


Given that the Nigerian economy is sliding into a second quarterly contraction in 2020 and bouncing off the size of the fiscal budget for 2020, borrowing becomes inevitable to spur growth and initiate a quick rebound (see Illustration 1).


Illustration 1: Debt Worries and Its Many Headaches

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Overlapping Generations and Nigeria's Debt Castle

There have been fears by Nigerians that the ballooning size of Nigeria's debt if not carefully managed might affect the fiscal fortunes of a younger generation. The concerns are understandable in the light of Nigeria's recent fiscal history. Nevertheless, the fiscal authorities will continue to borrow. The minister of finance, Mrs. Zainabe Ahmed, has said that she expects that Nigeria's debt stock by the end of 2021 would have risen to N38trn up from an estimated N32trn in Q4 2020.

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Current Realities and Debt Sustainability

Nigeria's near-term debt future appears grim. The economy's poor physical infrastructural appears to hamper manufacturing output as supply chain disruptions caused by COVID-19 continue to plague the country's economic real sector.  The weakness of public policy and a romance with obscure governance practice further stall hope of a quick rebound as investors put a freeze on added capital importation. To make matters worse a lack of free access to foreign exchange has inhibited FPIs and FDIs from putting up their shingles in Nigeria.   


Against this background, analysts have recommended that a limit be placed on the country's fiscal deficit with stiff consequences for the fiscal authorities if the limit is breached. Given Nigeria's high debt size, accessing new debts might be expensive as investors might impose a risk premium to cover the growing riskiness of Nigeria's fiscal position (see Illustration 2).


Illustration 2: Putting a Lid on Debt

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Going Forward

The Nigerian government's economic intervention so far supports a neoclassical fiscal outlook. The central argument of this economic school of thought is that underdevelopment results from poor resource allocation due to incorrect pricing policies and excessive state intervention. The neoclassicists argue that the developing world is underdeveloped not because of the predatory activities of the developed world and the international agencies that they control but because of the heavy-handedness of the state and the problems of endemic corruption, inefficiency, and the absence of economic incentives.


Given the dire impact of the COVID-19 pandemic on Nigeria and other frontier economies, the World Bank has recently advised that these countries spend more to cushion their economies against the effects of the virus. But, given its slim budget, the Nigerian government's fiscal planners may need to concentrate on targeted spending to increase productivity despite its shrunken wallet, as it focuses on capital expenditure. Analysts also believe that as hard as it might appear at first blush, the government must inevitably come to terms with the need to significantly trim the cost of governance. Unfortunately, that bitter conversion may not happen anytime soon.

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