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Concern mounts over Nigeria’s rising debt profile

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Concern mounts over Nigeria’s rising debt profile

Latest data released by the National Bureau of Statistics (NBS) on Nigeria’s rising debt profile has reignited concerns that the country could be headed for a debt meltdown. TONY CHUKWUNYEM writes

President Muhammadu Buhari’s letter to the National Assembly on October 25 last year, seeking approval to borrow $29.9billion to finance infrastructure development from 2016 to 2019, clearly pushed the issue of sustainability of the nation’s debt profile to the front burner.
Analysts had pointed out at the time that Nigeria’s total external debt stock could rise to a record $40billion if President Buhari’s request got the National Assembly’s nod and if the country fully drew down on the proposed loan.

The analysts had further argued that apart from the fact that with an external debt stock of $40billion Nigeria would rank among the most indebted countries on the continent, the amount of debt ($40billion) would be $10billion more than $30billion foreign debt that the nation had accumulated when it was caught in a debt trap in the early 2000s..
Then, it took a lot of efforts before the country got out of that debt trap in 2005, as it had to negotiate with the Paris Club of creditors to write off 60 per cent or $18billion of that amount after making a controversial bullet payment of $12.4billion.
But as it turned out, the debate over the issue quickly died down in financial circles after the Senate rejected the President’s request without even debating it.

NBS data
However, the release of a report by the National Bureau of Statistics (NBS) last week showing that Nigeria’s debt profile increased by 40 per cent since President Buhari assumed office on May 29, 2015, seems to have sparked a fresh debate on the issue.
According to the NBS data, Nigeria’s total foreign and domestic debt stocks as at June 30, 2017, stood at $15.1 billion and N14.1 trillion respectively.
The report also showed that the total foreign debt profile of the Federal and the 36 states governments and the Federal Capital Territory (FCT) has been steadily rising since the coming of the present administration, from $10.718 billion in 2015, to $11.406 billion in 2016 and $15.047 billion in 2017.
Specifically, the report states that out of the current total foreign debt figure of $15.047 billion, the Federal Government accounts for $11.106 billion, or about 74 per cent, while the 36 states of the Federation and the FCT owe about $3.94 billion, or 26 per cent.

A breakdown of Nigeria’s foreign debt stock, according to the NBS, indicates that multilateral debt accounts for $9.67billion, bilateral debts stood at $218.25million while $5.15billion constitute credit from the Exim Bank of China to the Federal Government.
The NBS figures also reveal that out of the total N14.017 trillion national debt stock, the Federal Government accounts for about N11.058 trillion, or 78.66 per cent, compared to N2.959 trillion or 21.34 per cent for all the states and the FCT.
A further breakdown of the Federal Government domestic debt stock by instruments, show that about N7.56 trillion, or 68.41 per cent were in bonds; N3.28 trillion, or 29.64 per cent in treasury bills, while N215.99 million, or 1.95 per cent went into treasury bonds.

NEITI cautions
Indeed, the NBS report came about a month after the Nigeria Extractive Industries Transparency Initiative (NEITI) expressed concern over the high level of the nation’s indebtedness, cautioning that Nigeria’s debt in relation to revenues appears to have reached critical levels.
The agency, which stated this in its latest Quarterly Review that focused on disbursements from the Federation Accounts and Allocation Committee (FAAC), disclosed that a total of N513 billion was spent on debt servicing by the three tiers of government in the first quarter of 2017, compared to total disbursements of N1.276 trillion.
It said: “This means that debt servicing took up 40.27 per cent of FAAC disbursement for the first quarter of this year. The figure reveals that debt servicing as proportion of total FAAC allocations is generally higher in the first quarter of the year, after which it falls to lower levels. Based on this, the figure of 40.27 percent observed in the first quarter of 2017 might be an upper threshold and it would thus be expected that this figure will be lower for the remaining quarters of the year.”

It added that domestic debt servicing constituted 90 per cent of total debt servicing, explaining that domestic debt servicing consistently outstripped external debt servicing. According to the NEITI report, in the first quarter of 2015, domestic debt servicing made up over 93 per cent of total debt servicing, while the trend was the same in the first quarter of 2017 as domestic debt servicing was over 92 per cent of total debt servicing.

IMF, World Bank warnings
Significantly, a few months ago, both the International Monetary Fund (IMF) and the World Bank, warned about Nigeria’s rising debt profile.
For instance, in its World Economic and Financial Surveys released in May, the IMF projected that Nigeria’s indebtedness would climb to 24.1 per cent of its Gross Domestic Product (GDP) by 2018.
Noting that Nigeria ended 2016 and 2015 with a debt to GDP ratio of 18.6 per cent and 12.1 per cent respectively, the IMF estimated that by the end of 2017, the country’s current indebtedness would have reached 23.3 per cent of the GDP,
Thus by the Fund’s projection, Nigeria’s debt to GDP ratio would have jumped by 100 per cent, from 12.1 per cent in 2015 to 24.1 per cent in 2018.
Similarly, in its Global Economic Prospects report, issued in July, the World Bank expressed concern about the sustainability of Nigeria’s interest-to-revenue ratio. Noting that debt servicing costs had risen but remained sustainable for most countries, it said the rise in government’s debt, exchange rate depreciation, and increased recourse to non-concessional borrowing for infrastructure development had resulted in rising debt servicing costs.

The report said: “However, for most countries in the region, the interest-to-revenue ratio remains sustainable, helped by the high share of concessional borrowing. A notable exception is Nigeria, where the Federal Government’s interest-to-revenue ratio rose from 33 per cent in 2015 to 59 per cent in 2016.”
Senior Economist at the World Bank office in Nigeria, Yue Man Lee, said the debt would be unsustainable unless Nigeria increased its revenue base or worked towards balancing its debt profile.

DMO counsel
Perhaps even more important is the fact that the Debt Sustainability Analysis (DSA) carried out in 2016 by the Debt Management Office (DMO) in collaboration with relevant stakeholders, showed that for the first time since Nigeria exited the London and Paris clubs of creditors between 2005 and 2006, the nation’s debt position experienced some deterioration and slipped from, as the agency put it: “low-risk of debt distress to a medium risk of debt distress.”
The DMO stated that this indicates that Nigeria’s debt burden indicators might deteriorate in the medium-to-long-term, if adequate measures were not put in place to raise the revenue profile of the country.

The agency further noted in the study that although Nigeria’s level of debt stock was still appreciably low relative to the country’s aggregate output (GDP), the debt portfolio remained mostly vulnerable to the various shocks associated with revenue, exports and substantial currency devaluation.
It, therefore advised the Federal Government not to borrow above $22.08 billion in 2017, stating : “The maximum amount that can be borrowed (domestic and external) by the Federal Government of Nigeria in 2017, without violating the country-specific threshold, will be $22.08 billion (i.e. 5.89 per cent of $374.95 billion).”
More debts coming
Interestingly, however, the Director-General, DMO, Patience Oniha, revealed last week that the federal government had plans to release more Eurobonds by the fourth quarter of 2017.

Oniha, who made this known while speaking on the N100 billion Islamic Bond (Sukuk) recently issued by the government, stated: “On what the DMO is looking at to bring down debt service, one part of it is what has been running already, which is trying to increase the share of external debt because what we get from that side is an extended tenor and a lower cost of borrowing, so that strategy is ongoing and we expect to be in the market again in the fourth quarter of this year with more Eurobond or a Eurobond and a diaspora bond, whichever works in the best interest of Nigeria.”
Analysts point out that in addition to the N100billion Islamic Bond, the government is also planning to issue a N20 billion “green bond” before the end of the year. It had raised $1.5 billion Eurobond in the first quarter and sold another $300 million Diaspora bond in June.

Despite the soaring cost of debt service, the Minister of Budget and National Planning, Udoma Udoma, has insisted that Nigeria’s debt is still manageable. Speaking at a press conference recently, he said: “It’s not that we don’t have enough revenue. We have resources but not enough revenue coming to government. Right now, the taxes that we collect is about 6per cent of GDP. In most countries, it’s over 20per cent; the average for Africa is about 16per cent.
“So when people say we have a debt problem, no. What we have is a revenue problem. If we have enough revenue our current debt is manageable,” Udoma stated.

Last line
However, a financial expert, who spoke on condition of anonymity, said: “Government definitely needs to borrow to fix critical infrastructure in order to stimulate economic activities. However, my worry is that we usually lack the discipline to ensure that the funds raised, especially via bonds, are invested in projects that will really boost the economy and not those targeted at winning votes. I won’t be surprised if some of the key projects they are making so much noise about end up being abandoned.”

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