Debt service-to-revenue ratio jumps 162% amid FX, subsidy reforms

Nigeria’s debt-to-service-revenue ratio quickened to 162 percent in the first half (Q1) of 2024, up from the 128 percent reported in the same period of 2023.

This is despite the foreign exchange and petrol subsidies policies implemented by President Bola Tinubu administration last year that were supposed to improve the government’s revenue, control its deficit and lower borrowings.

A rising debt-service-to-revenue ratio means that a large percentage of the government’s revenue, which should be used for capital expenditures, is portioned to pay off debt commitments.

Read also: Nigeria’s public debt rises by N12.6trn in three months on naira depreciation

For instance, debt service costs surged by 69 percent year-on-year to N6 trillion in the first six months of this year, consuming about half (50 percent) of the federal government’s aggregate expenditure, highlighting the significant burden of debt obligations on the government’s finances.

Also, Nigeria’s public debt stock rose by N12.6 trillion between March and June 2024 amid continued depreciation of the naira, which has remained pressured despite the Central Bank of Nigeria (CBN)’s efforts to shore up the local currency.

This spike in the nation’s debt burden now puts the total debt at N134.3 trillion, according to the most recent data published by the Debt Management Office (DMO).

“The modest rise (in Nigeria’s public debt stock) was driven by two factors. The first is the depreciation of the naira, which added about NGN5.9trn to the total debt stock,” said analysts at Lagos-based FBNQuest Capital Research in a note on Tuesday.

The analysts explained that the exchange rate used to convert dollar-denominated debt to naira was NGN1,470.2/USD compared with NGN1,330.3/USD in Q1 ’24.

“An additional contributing factor is due to fresh borrowings from the domestic market.”

Africa’s most populous nation’s debt stock has grown from 53 percent recorded in the first quarter (Q1) to 58 percent in the second quarter (Q2), defying the DMO’s public debt ceiling of 40 percent, as outlined in the agency’s Medium-Term Debt Management Strategy.

Although the current public debt-to-GDP ratio is slightly below the IMF’s 60 percent benchmark for emerging market countries, the nation’s weak revenue profile and FX volatility risks could further escalate debt levels, straining the already strained economy.

“By 2026, we project the debt stock will reach N185 trillion,” said Esili Eigbe, director at consulting firm, Escap Management Ltd, in a previous report by BusinessDay.

“Despite this, authorities seem unfazed, citing a lower debt-to-GDP ratio compared to global peers.

“However, the focus should be on the debt-to-government revenue ratio in our opinion, which places Nigeria among the countries least capable of repaying their debt,” Eigbe said.

Analysts have expressed concerns over the rising debt levels, warning that it could trigger a debt crisis for a country that’s reeling from its worst cost-of-living crisis in a generation.

“Rising debt levels put Nigeria at serious risk of a debt crisis,” Eigbe, who was cited earlier, said.

A debt crisis has severe implications for Nigeria. It would trigger a naira devaluation, credit downgrade, economic fragility, higher borrowing costs, persistent inflation, loss of investor confidence and social unrest.

Read also: Total debt stock of 36 states grew by 38.1% to N10trn in 2023

FG aims to double revenue

The Nigerian government, knowing that it has a shortage of revenue and ballooning debt profile, is proposing changes in its tax laws to significantly boost revenues, as the West African nation seeks to control its widening deficit and borrowing costs.

Taiwo Oyedele, head of the government’s tax reform committee, recently said in an interview that the reforms would lead revenue to “double within the next two to three years” as a share of gross domestic product. “If we are moving from 9 percent to 18 percent, that means we are doubling it.”

In what seems to be a corollary, analysts at FBNQuest Capital Research anticipate an improvement in the nation’s fiscal purse due to exchange rate gains and on-going efforts by the federal government to increase non-oil revenue.

“However, we expect to see a rise in Nigeria’s debt burden due to extensive government spending and higher naira costs resulting from the Naira devaluation,” it said.