Thursday, September 17, 2020 / 11:02 AM / By CSL
Research / Header Image Credit: Umegboro
At a recent meeting with members of the Presidential Economic Advisory Council (PEAC), President Buhari noted that government borrowing was necessary to bridge the huge infrastructure deficit across the country. The President further noted that investment in roads, rail and power remains critical in attracting investors to the economy.
Nigeria's huge infrastructure deficit has been a topical discourse as it is widely believed that poor infrastructure is one of the biggest challenges to the ease of doing business. From poor port infrastructure, dilapidated transport networks, epileptic power supply, huge housing deficit, Nigeria's infrastructure gap cannot be overemphasized. According to the IMF, Nigeria's infrastructure stock of c.25% of GDP remains far below the 70% international benchmark.
In an attempt to bridge the huge infrastructure deficit, the government has relied heavily on a combination of domestic and external borrowings to fund capital projects. According to the data published by the Debt Management Organisation (DMO), Nigeria's total debt stock grew by 20.6% y/y and 8.3% q/q to N31.0trn (US$85.9bn) based on an exchange rate of N361/US$1 adopted by the DMO) as at the end of June-2020. We note that the substantial increase in the public debt stock was due to the devaluation of the official exchange rate from N306/US$1 to N361/US$1 which affected the external debt component coupled with increased domestic borrowings as government took advantage of the low yield environment.
Over the years, continuous underperformance in revenue targets in the face of rising debt level has pushed the nation's debt servicing to revenue ratio to levels that significantly undermine the availability of fiscal buffers in mitigating the adverse impacts of macroeconomic shocks. We highlight that the debt service to revenue ratio stood at an all time high of 99% in Q1 2020 when the twin shocks (COVID 19 and crash in the oil market) affected government revenues. The elevated debt servicing cost has raised concerns on the sustainability of public debt.
In our view, the current fiscal structure of government characterized by low government revenue, undiversified export earnings, elevated recurrent expenditure, high cost of governance have contributed to the reliance on borrowings and elevated debt servicing cost. Hence, in our view the government needs to explore unconventional methods of financing to bridge the huge infrastructural deficit. In this regard, the creation of a strong framework for private sector investments through public-private partnership (PPP) remains a viable option.