Nigeria’s refinancing plan: Impact on debt sustainability is likely to be modest


Thursday, August 24, 2017 7:00AM /PWC

FEC approves USD 3 billion debt issuance to refinance maturing treasury bills.

The Federal Executive Council (FEC) recently approved a plan to issue USD3 billion worth of foreign bonds of up to three years’ maturity to refinance maturing nairadenominated treasury bills. This decision is in line with the Federal Government’s (FG) debt management strategy to rebalance its debt portfolio for domestic and foreign debt, from the current 69%:31% to a targeted 60%:40%. Although this plan is yet to be approved by the National Assembly, we expect that if implemented, it would have a modest impact on broad debt sustainability indicators.

Impact on cost of debt likely to be muted

Although timelines are not clear, we suspect issuance is unlikely to be earlier than 2018, given the extensive preparatory work required in issuing international sovereign bonds. Consequently, we assume the impact on public debt ratios would become evident as from 2018.

We estimate that Nigeria’s stock of treasury bills would be around NGN3.8 trillion by end-2017. Refinancing USD3 billion worth of maturing bills with dollar borrowing would result in a reduction in this stock by as much as 9%. External debt on the other hand would increase by c.46% to NGN6.3 1tr illion (USD20.6 billion) by end-2018.1 Under this scenario, debt to GDP rises by 3 percentage points, from an estimated 16% in 2017 to 19% in 2018.

Nonetheless, the impact on the cost of debt is likely to be muted. The Debt Management Office (DMO) reports the weighted-average interest rate on debt which takes into account the proportion of instruments issued. Treasury bills account for 16% of total FG debt, and the portion to be refinanced is about one-quarter of treasury bill maturities in 2018. Thus, we estimate the weighted average interest rate could increase to 13%, in 2018 from an estimated 12% in 2017 and 11% in 2015.

Growing concerns over debt sustainability are overdone

Our analysis of key debt sustainability indicators suggest that the probability of debt distress at this time is low. We define debt distress as a scenario which requires a country to (i) incur substantial arrears on external debt, (ii) receive debt relief, and (iii) receive non-concessional balance of payments 2support from the International Monetary Fund (IMF).2

Among the various indicators based on the level of debt stock, external debt to exports is cited as the most useful, as exports provide the basis for debt repayments. We estimate that Nigeria’s external debt to exports could rise by 7 percentage points to 34% in 2018. This is however well below the threshold of 100% prescribed by the IMF, and the peak of 104% recorded during Nigeria’s debt crisis in 2004.

Stress testing the impact of an export shock

A devaluation in the currency is a key risk to external debt sustainability. However, this risk is somewhat offset by the natural hedge provided by the high foreign currency composition of government revenues.

Under a scenario of an export shock similar to the episode recorded in 2015, we assume a 44% decline in exports in 2018. Following this, we estimate external debt to exports will rise sharply to 71%, up from 27% in 2017. While Nigeria’s debt vulnerability worsens under this scenario, it still remains below the 100% threshold level - at this level, Nigeria’s external debt would need to reach USD60.2 billion.

Improving revenue mobilisation is key for debt sustainability
While Nigeria’s near term public debt ratios remain relatively comfortable, we are mindful of the trend in debt service ratios. We estimate that debt service to revenue ratio is likely to remain elevated at 50% in 2018, breaching the 3recommended t hreshold of 25%.3 This represents the fourth consecutive increase since 2015. Given the outlook for lower for longer oil revenues, we expect the government to do more in mobilising non-oil revenues to bridge the fiscal deficit, to meet the objective of reducing the “crowding out” impact of domestic borrowing.

There is room for tax mobilisation as Nigeria’s non-oil tax to GDP at 2.3% in 2016 remains well below the average of 16% 4among Sub-Saharan Africa countries.4 Similarly, the policy framework for investment incentives should be periodically assessed against intended policy objectives and revenue forgone. This would ensure that the investment incentive framework is targeted, cost effective and sustainable.


1.       Budget Office (2016) Federal Government Nigeria 2017-2019 Medium Term Expenditure Framework and Fiscal Strategy Paper

2.      Aart Kraay and Vikram Nehru (2004) When is external debt unsustainable?, World Bank Policy Research Working Paper 3200

3.   International Monetary Fund (2017) Debt Sustainability Framework for Low-Income Countries

4.      Data is as at 2013, sourced from the World Bank databank

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