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Debt servicing gulps 98% of Nigeria’s 5-month revenue

The 2021 budget implementation report stated that the Federal Government spent a total of N1.8 trillion on debt servicing in the first five months of the year, representing about 98 percent of the total revenue generated in the same period.

A look at the data reveals that the total aggregate revenue generated by the government between January and May 2021 stood at N1.84 trillion, representing a shortfall of N1.48 trillion compared with the expected revenue of N3.32 trillion.

The government says it released N973.13 billion for the implementation of capital projects contained in the 2021 budget between January and May. It also discloses that debt servicing gulped N1.8 trillion within the same timeframe.

Read Also: Nigeria’s debt rises to N32.2trn as domestic borrowing gulps 62%

Zainab Ahmed, minister of finance, budget and national planning, disclosed this at the presentation of the draft for 2022-2024 Medium Term Expenditure Framework and Fiscal Strategy Paper in Abuja on Thursday, July 1, 2021.

According to Ahmed, as of May, the Federal Government had spent 92.7 percent of the prorated budget, which amounted to N4.8 trillion. Out of this amount, N1.8 trillion was released for debt servicing, which represented 37 percent of expenditure; N1.5 trillion was spent on personnel cost, including pensions, while N973.13 billion was spent on capital projects.

Debt Management Office (DMO) report in March ‘21 revealed that the country’s debt increased by 0.61 percent to N33.1 trillion from N32.9 trillion in December 20. This means Nigeria grew its debt burden by N191 billion in the first three months of the year amid dwindling revenue and devaluations in the economy.

The cut in Nigeria’s oil production quota has also significantly affected its revenue. The nation currently maintains a crude oil production of 1.4mbpd despite a production capacity of 2.5mbpd.

Nigeria’s external debt is considered to be the biggest in sub-Saharan Africa and has already been rescheduled several times. In spite of this rescheduling and refinancing by creditors who were either members of the Paris Club (governments), London Club (banks) or independent creditors, arrears of this debt kept accumulating over time.

Records show that Nigeria’s external debt remained low until the middle of the 1970s. It was $1.5 billion in 1970 and $2.5 billion in 1975. The situation began to get out of control around 1977 when an outstanding growth rate in the country’s debt became manifest. The outstanding debt reached $7.5 billion in 1979 and $8.9 billion by 1980.

This was due to excess borrowing from international agencies and countries at non-concessional interest rate as a result of the decline in oil earnings, and the emergence of high trade arrears. This was due to the inability of the country to either produce or foot the bills of importation of needed goods and services.

By 2005, the nation’s debt had ballooned to about $30 billion, mostly borrowed from the Paris Club of creditors. Nigeria and the creditors’ club then went into a series of negotiations on a mutually acceptable relief on the $30 billion debt with the Paris Club.

In October 2005, Nigeria and the Paris Club announced a final agreement for debt relief worth $18 billion. The creditors had cancelled $18 billion and Nigeria repaid $12 billion. Most of the $18 billion was registered as aid. The deal was completed in April 2006, when Nigeria made its final payment and its books were cleared of any Paris Club debt.

By September 2020, the DMO revealed that the country’s total public debt stock stood at $84.574 billion. DMO explained that the debt stock was made up of the domestic and external debt stocks of the Federal Government, the 36 states and the Federal Capital Territory. A breakdown of the public debt stock showed that 37.82 percent was external, while the balance of 62.18 percent was domestic.

In May 2020, the House of Representatives mandated some of its committees to investigate all China-Nigeria loan agreements, to ascertain the viability of the facilities, then regularise and renegotiate them when necessary.

According to the DMO, as of March 2020, the total borrowing by Nigeria from China was $3.121 billion, accounting for 11.2 percent of the external debt stock of $27.67 billion. This has shown that China is not really a major source of funding for the Nigerian government.

The MTEF/FSP is the government’s pre-budget statement that is usually taken into consideration during the preparation of the budget estimates for Ministries, Departments and Agencies. It presents the development priorities of the Federal Government for the period covered.

The finance minister disclosed at the recent MTEF/FSP meeting that the government would spend N900 billion on petrol subsidy in 2022. In response to a question posed on petrol subsidy, she stated that the amount currently spent on subsidising petrol could be redirected to more productive sectors of the economy such as health, education and infrastructure.

“This is costing us big time. We are spending over N150 billion on subsidies. That means NNPC has to use that amount of money to pay for PMS and distribute it. That is money that the federation account can share,” the minister said.

“This is money that could have been available for education, health and infrastructure, reduce our borrowing, increase the amounts that states and local governments are collecting. We are being penny wise pound foolish to think that by giving this subsidy that citizens are benefitting. But by the end of the day, the citizens are actually the ones that are carrying the brunt of the wealthy,” she said.

She also stated that there was a need to completely remove the subsidy on fuel as the subsidy was only benefiting the rich. She stated that they are projected to be paying at least N900 billion subsidy next year.

A review of the 2022 Federal Government spending showed that the projected subsidy budget of N900 billion is higher than the N261.2 billion budgeted for overhead costs for Government Owned Enterprises; N567.02 billion for pension, gratuities and retirees; and N366.13 billion capital supplementation budget.

It also exceeds the N292.7bn for sinking funds, N750.03bn personnel cost for Government Owned Enterprises, and N335bn overhead cost.

The Nigerian government’s increase in debt service to revenue ratio at 98% indicates that the country is spending practically all its revenue on servicing debts. This could potentially lead to a deepening crisis considering the need for the country to service its CAPEX projects to solve its infrastructure needs.

The recent positive rally in the global oil market has not yielded substantial growth in government revenue due to Nigeria’s reduced production quota. Notably, according to the foreign trade report by the NBS, the value of crude oil export has reduced to N1.9tn in Q1 ‘21 from N2.52tn recorded in the previous quarter.

Laoye Jaiyeola, CEO, National Economic Summit Group (NESG), said, though Nigeria’s debt to GDP ratio could be considered low, the revenue that went into debt servicing was still on the high side.

He opined that expending 25 percent to 30 percent of national revenue on debt servicing, as presently done by the Nigerian government is not sustainable.

He suggested a drastic cut in running cost of governance, reduction in recurrent expenditure, as well as removal of subsidies in electricity and petroleum products, as a way of reducing the debt burden.

“Some people say that the debt to GDP ratio is still low. It could be low, but servicing debt is still a challenge,” Jaiyeola stated.

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