External Debt: Is It Really Cheap?


Saturday, April 14, 2018 / 11:00 PM / Proshare Research

Over the years the astronomical increase in government debt servicing has raised eye brows especially in the face of limited revenue. After all, debt servicing does not trigger either consumption or investment.  Such spending are leakages which are commitments that end up reducing fiscal space.

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The need to weigh down on debt servicing became inevitable when debt to revenue ratio stood at 0.46.  The fiscal side avoided the approach of decelerating expenditure but became more choosey at expenditure. Thereby, allowing expenditure to become more prioritized coupled with stronger fiscal house cleaning. This position was on the back of a downturn when reflating the economy. 

Certainly, the idea of a complete fiscal retrenchment was unlikely in the face of a recession. Therefore, the following decisions were taken in addition to fiscal house cleaning in order to boost the revenue side.

·         Increase non-oil revenue, especially Value Added Tax (VAT)

·         Reshuffle the debt mix 

·         Rationalize cost

·         Absorb oil subsides through the NNPC

In line with reshuffling the debts mix’s, the present administration has reduced its involvement in the domestic money market. Rather the fiscal side chooses to issue more of foreign debts, providing an ample opportunity to absorb more of cheap foreign debts to the already existing pool.

More importantly the decision has led to an astronomical increase in the net foreign asset of banks, given their large chunk of government foreign debt. 

Fig 7: External Debt (%) of GNI

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Source: UNDP


The administration has been able to decelerate the pace of debt repayment due to the cheap rate on foreign debt. However for a country that has strong export concentration coupled with a nominal currency that seems to have no slow movement bias the question is “how cheap is external debt”.

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