DMO Publishes 2019 Debt Sustainability Analysis Report

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Thursday, September 16, 2021 / 06:45 PM / by DMO / Header Image Credit: IFS

 

Background

The Government recognises the need to ensure that the Total public debt remains sutainable in the medium to long-term by conducting annual DSA, which is consistent with macroeconomic framework, to assess the current and future debt levels, as well as its ability to meet debt service obligations as and when due, and without compromising growth and development.


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The objective of the 2019 DSA is to evaluate the country's risk of debt distress, considering Nigeria's capacity to carry its current debt and future borrowings under both Baseline projections and Shock scenarios. Thus, it helps to inform the borrowing decisions of Government. The DSA, therefore, serves as a key input into the country's Medium-Term Expenditure Framework (MTEF), the Fiscal Strategy Paper (FSP), and the Federal Government of Nigeria (FGN) Annual Budget, as well as reflects Medium-Term Debt Management Strategy (MTDS). It also highlights Government's commitment to fiscal discipline in line with the Fiscal Responsbility Act.

 

The 2019 DSA Exercise was conducted from November 14-23, 2019 by the DMO and other stakeholders, namely: the Federal Ministry of Finance, Budget and National Planning (FMFBNP), Central Bank of Nigeria (CBN), Budget Office of the Federation (BOF), National Bureau of Statistics (NBS), and the Office of the Accountant-General of the Federation (OAGF).

 

Key Macroeconomic Assumptions

The 2019 DSA derives its Baseline assumptions from the 2019 Appropriation Act, and the 2020- 2022 Medium-Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP), which reflect the key objectives and priorities of the Economic Recovery and Growth Plan (ERGP). Sustaining and accelerating inclusive growth, diversification of the productive base, and maintaining macroeconomic stability are among the key thrusts of the MTEF, which are consistent with the goals of the ERGP. In particular, the 2019 Federal Government Appropriation Act (2019 Budget) titled 'Budget of Continuity' was planned to further place the economy on the path of comprehensive, diversified and sustainable growth.

 

The Baseline scenario is predicated on improved medium-term outlook. Based on the 2019 Budget and MTEF projections, the real GDP is projected to moderate from 3.01 percent in 2019 to 2.93 in 2020, and then grow by 3.35 percent and 3.85 percent in 2021 and 2022, respectively. Headline inflation on year-on-year basis is estimated at 9.98 percent in 2019,while it is projected to inch to 10.81 percent in 2020, and then moderate to 10.52 percent and 10.79 percent in 2021 and 2022, respectively. 2.3 The ratio of Total Public Debt to GDP remained relatively low at 18.74 percent as at September 30, 2019. This compares favourably with the Country-Specific Debt Limit of 25 percent of GDP up to 2020, Public Debt to GDP threshold of 55 percent for countries in Nigeria's peer-group, as well as the West African Monetary Zone (WAMZ) Convergence Threshold of 70 percent of the GDP.


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Methodology and Scope of Debt Coverage

The methodology for the 2019 DSA was based on the revised World Bank and International Monetary Fund (IMF) Low Income Countries (LIC) Debt Sustainability Framework (DSF), which was launched in July, 2018. It is anchored on a Composite Indicator (CI), which evaluates the Debt Carrying capacity of a country by combining the World Bank's CPIA score and other macroeconomic variables, such as real growth rate, remittances, import coverage of reserves and World Economic Growth.

 

The coverage of Total Public Debt in the 2019 DSA include the External Debt, which consist of External Debt of the FGN and that of the thirty-six (36) States and the FCT. The FGN borrow on behalf of the thirty-six (36) States and the FCT, as they are not allowed to directly borrow externally. It also includes the Domestic Debt, comprising the FGN Domestic Debt and the Domestic Debt of the thirty-six (36) States and the FCT.

 

Findings, Conclusions and Recommendations

 

Final Risk Rating

The Final Risk Rating for the country from the outcome of the 2019 DSA revealed that Nigeria's External Debt remains at a Moderate Risk of Debt distress, but sensitive to Export shocks, while Nigeria's Total Public Debt remains sustainable, but subject to Revenue shocks. The mechanical risk rating was applied to derive the Final Risk Rating, as the application of judegement was not necessary.

 

On the External Debt Sustainability Analysis, the results show that the ratio of External Debt to GDP remains below its indicative thrsehold under the baseline scenario, however, the ratios of Debt-to-Exports, Debt Service-to-Exports and Debt Service-to-Revenue breached their respective thresholds with Exports being the most extreme shock under the shock scenario. For the Total Public Debt Sustainability Analysis, the ratio of Public Debt to GDP remains under its benchmark under the baseline scenario, but the revenue-related debt indicators were high under the shock scenario, indicating a revenue challlenge. The ongoing efforts by the government towards improving revenue generation and diversifying the economy to enhance exports, through various initiatives and reforms in the Oil and Gas, Agriculture and Solid Minerals sectors, Tax Administration and Collections, as well as the Strategic Revenue Growth Initiative with the recent signing into law the Finance Act by Mr. President, which takes effect from February 1, 2020 would improve the outlook for Total Public Debt with enhanced revenue performance. Thus, the Export and Revenue-related indicators and borrowing space are expected to improve in the medium to long-term.

 

The downside risks to Risk Rating include the limited debt data coverage, oil price volatility and oil production shocks, macroeconomic uncertainties, sustaining efforts on implementing the goals of ERGP, tight global financial conditions and global economy, which could negativelty affect exports and revenue.

 

With Moderate External Debt Risk Distress Rating, the country's Borrowing Space, otherwise referred to as Granularity, was assessed. The findings show that there is Some Space to Borrow based on the country's current revenue performance. The ratio of External Debt Service-to-Revenue trended towards its threshold, and breached it by 2021. With the concerted efforts by government to improve revenue through various initiatives and reforms in the various sectors of the economy, which are highlighted above, the country's borrowing space is expected to be enhanced considerably.


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Conclusion

The Final Risk Rating for the country from the outcome of the 2019 DSA revealed that Nigeria's External Debt remains at a Moderate Risk of Debt distress with some Space to accommodate shocks, while Nigeria's Total Public Debt remains sustainable, but subject to Revenue shocks. The ongoing efforts by the government towards improving revenue generation and diversifying the economy to enhance exports, through various initiatives and reforms in the Oil and Gas, Agriculture and Solid Minerals sectors, Tax Administration and Collections, as well as the Strategic Revenue Growth Initiative with the recent signing into law the Finance Act by Mr. President, which increases the Value Added Tax (VAT) from 5 percent to 7.5 percent, effective February 1, 2020 would improve the outlook for Total Public Debt with enhanced revenue performance. Thus, the Export and Revenue-related indicators and Borrowing Space are expected to improve in the medium to longterm.

 

Recommendations

The key policy recommendations of the 2019 DSA exercise include:

 

Borrowing Limit for 2019

The Borrowing Limit for 2020 is determined based on the 25 percent Country-Specific Debt Limit (up to 2020) for the Total Public Debt-to-GDP ratio. Given that the DSA projected Total Public Debt-to-GDP ratio is 19.1 percent by end-December 2019, the fiscal space available for borrowing is estimated at 5.9 percent. However, based on the projected 2020 GDP of US$468 billion, the Borrowing for the fiscal year will be US$27.61 billion or 5.90 percent of US$468 billion. Therefore, the maximum amount that may be borrowed in the fiscal year 2020 without breaching the Country-Specific Debt Limit is US$27.61 billion. In line with the country's Debt Management Strategy, the proposed New Borrowing could be raised in equal proportion of 50:50 from both Domestic and External sources as follows:

  • New Domestic Borrowing US$13.806 billion (equivalent of about N4.211 trillion); and,
  • New External Borrowing: US$13.806 billion (equivalent of about N4.211trillion).

 

Boosting Government Revenues

The Government should focus on sustaining the ongoing initiatives and reforms aimed at boosting revenue generation. These include: Strategic Revenue Growth Initiative with the recent signing into law the Finance Act by Mr President, which would increase the Value Added Tax (VAT) from 5 percent to 7.5 percent, effective February 1, 2020; Deep Offshore and Inland Basin Production Sharing Contract; as well as Solid Mineral sector reforms. In addition, there is the need to also sustain the implementation of the Treasury Single Account (TSA), Government Integrated Financial Management Information System (GIFMIS) and Integrated Payroll and Personnel Information System (IPPIS) aimed at strengthening Public Financial Management, as well as enhance the efficiency and quality of spending. All these initiatives and reforms are necessary for enhancing the country's resilience to revenue shocks.

 

Leveraging on Private Sector Financing to support Infrastructural Development

Given the huge funding requirements for development of critical infrastructure and other capital projects vis-a-vis the current low revenue performance, there is the need for the Government to explore the use of Off-Balance Sheet arrangements to fund such capitalintensive projects. Some of the arrangements include: Public Private Partnerships (PPPs) - particularly Concessioning Schemes to attract Private Sector participating in the delivery of 9 viable infrastructural projects, which may require the issuance of Sovereign Guarantees for selected priority and high-impact projects.

 

Close Monitoring of Contingent Liabilities

The Contingent Liabilities may present fiscal risk in the medium to long-term, if it continues rising without effective monitoring. The crystalization of contingent liabilities with unexpected increase in debt may lead Total Public Debt to an unsustainability path. Therefore, there is need to intensify the ongoing efforts towards developing a framework for identifying, estimating, disclosing, managing and containing contingent liabilities, especially those arising from State-owned Enterprises (SOEs).

 

Effective Implementation of the SF-TAS Programme

To sustain effective implementation of the SF-TAS programme aimed at strengthening public financial management at the sub-national level, to ensure that the 36 States and the FCT are able to achieve fiscal transparency and accountability, domestic revenue mobilisation, effeciency in public expenditure, and debt sustainability. This would enhance overall sustainability of the Public Debt Sustainability in the medium to long-term.

 

Download Full PDF Report Here


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