Nigeria’s debt service ratio now world’s worst, says EIU

As the amount spent by the federal government on servicing debts exceeded what it earned in the first four months of this year, the Economist Intelligence Unit (EIU) has said Nigeria’s debt service-to-revenue ratio has become the highest in the world.

“The staggeringly high 118.9 percent debt service/revenue ratio in January-April is the world’s worst and underlines unsustainable fiscal policy,” analysts at the EIU said in a global note to investors on Wednesday.

According to the report, Nigeria’s federal government debt service payments in the first four months of 2022 totalled N1.9 trillion, which was greater than its total revenue of N1.6 trillion, according to the 2023‑2025 Medium-Term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP) draft presented by Zainab Ahmed, the finance, budget and national planning minister, on July 21.

“It confirms that Nigeria’s fiscal position is untenable, despite high international oil prices. We consider both subsidy and tax reform as inevitable in the medium term,” it said.

On the back of this, the EIU said Nigeria’s deficit for 2022 could now be expected to top 6 percent of GDP.

Nigeria already has the highest number of out-of-school children in the world and years ago, it was awarded the label of poverty capital of the world on account of its burgeoning population of absolute poor.

The EIU said it mattered that Nigeria’s debt service-to-revenue ratio has become so elevated but also because the level of Nigeria’s debt service-to-revenue ratio underlines the country’s unsustainable fiscal policy and the government of President Muhammadu Buhari’s stubborn resistance to changing policy.

It said: “High global oil prices are not translating into government receipts because of an expensive petrol subsidy, which the government essentially buys from the national oil company in exchange for income from crude sales.

“The main issue is that Nigeria is underproducing oil. Output of 1.17m barrels/day (b/d) in June compares with sustainable capacity of 1.5m b/d and is being kept low by insecurity in oil‑producing areas, and theft and vandalism of infrastructure are huge problems. The subsidy is clearly unsustainable, given the debt service/revenue ratio, but will not be stopped before a general election in February 2023.”

The EIU said that in response, markets have baulked at Nigeria’s fiscal pressures: credit default swap spreads have risen steadily since April (as the petrol subsidy bill began to spiral) and topped 1,000 basis points in late July — a spread not registered since the depths of the coronavirus pandemic shock in April 2020.

It said: “Restricted access to the international capital market is forcing the Nigerian government to borrow domestically at high-interest rates.

“At N3.1 trillion, the government deficit in January-April was almost double its income and stemmed from a 50.9 percent shortfall in revenue relative to budget, despite an underspend of 18.3 percent.