It is a sad reality that the Nigerian economy has failed to rise above its recovery phase since its exit from the 2016 recession, instead remained stuck within an average 2 percent GDP growth in the last 4 years. It is rather more disturbing that despite intense borrowings by the federal government within this period to make up its budget deficits across these years, the impact hasn’t been felt in an economy wholly in need of growth. This has been hinged largely on the need for clarity and accountability when considering new debts.
READ ALSO: Inside details of Nigeria’s $29bn borrowing plan
The Debt Management Office (DMO) released Nigeria total debt stock for 9 months ended 2019 and largely expected is a further increase in country’s debt level year on year by c.17 percent to N26.2 trillion ($85.39 billion at an official exchange rate of N307 to $1).
Since September 2015, Nigeria’s total debt stock has accelerated at an annual average rate of 20 percent, a rate much faster than its GDP growth during the same period. Also, our analysis shows that the government appetite to borrow was fuelled in 2019 with a 17 percent increase in total debt stock y/y, halting a decelerating trend in debt increase since 2016.
While some analysts have argued that Nigeria still remains within a comfortable range given the debt to GDP ratio of c.18.5 percent, some 6.5 percentage points below 25 percent target level hence more room for borrowing; more worrisome is the ratio of debt service ratio to government revenue which is more than 50 percent.
According to a report by United Capital, “this provides a strong justification for the current FG’s drive to increase oil and non-oil revenues significantly. However, we believe more needs to be done in terms of clarity and accountability for new borrowings.”
Debt in itself isn’t outrightly bad as there is no economy in the world that is debt-free. However, channelling borrowed funds into viable economic stimulating projects able to fund itself and generate returns is a good justification for incurring debts as a nation. “Nigeria’s major challenge is spending not really revenue. We spend on things that doesn’t justify our borrowings and abandon projects that matter,” an analyst who pleaded anonymity told BusinessDay.
We shouldn’t also be quick to forget that Nigeria faces revenue challenges, hence its inspiration to accompany its appropriation bill with a finance bill.
The newly signed finance bill which is intended to take effect in February, provides among other things the possibility for the federal government to see non-oil revenue increase on the back of a VAT hike to 7.5 percent, hence a diversification from a more volatile revenue source in the oil sector of which forms more than 90 percent of the federal government FX inflow.
“The increment in VAT will support government revenue obviously, but won’t be sufficient to bridge the fiscal deficit hence there won’t be a fundamental change in borrowing plans of the government in line with what we saw in 2019,” Gbolahan Ologunro, research analyst at CSL stockbrokers told BusinessDay in a phone conversation.
Given the levels of borrowing cost in the T-bills spaces, this will mean the federal government would be able to borrow at lowers levels compared to what was obtainable in the early periods of 2019. Also, the clamour for higher minimum wage by the Labour would mean more pressure on personnel cost which is a component of recurrent expenditure, hence, seeing major bulk of revenue generated from VAT used for that purpose leaving little for financing capital projects.
Speaking on the direction of borrowings expected by the government in 2020, Ologunro maintains that, “rates a still relatively lower in the domestic market than in the external market. However, in 2020 we will see the issuance of Eurobonds unlike in 2019 on the back lower yield in the global space following the 3rd consecutive rate cut of the US fed.”
According to him, on a net basis, it is favourable to look at the external market from the perspective of bonds given the rate cuts by the US fed, Nigeria is likely to issue Eurobonds at a lower cost than its last issuance. However, given recent credit downgrade ratings from Moody and Fitch, “we believe that there would not be a material reduction in the cost of issuing Eurobonds.”
Given the domestic and external debt mix target ratio of 60/40 percent, the Nigerian federal government is likely to tilt more to raising funds domestically than internationally.
