BusinessDay

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

FEC approves three-year budget framework

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.

“The MTEF/FSP draft contains two scenarios for federal budget estimates for 2023. Under a scenario where petrol subsidies —estimated to cost N6.7 trillion for the whole of 2023 — end mid‑year as planned, total spending would be N18 trillion, which is 3.9 percent more than the 2022 budget.

“However, under a business-as-usual scenario without subsidy reform, expenditure is estimated at N17 trillion, which is 1.9 percent lower than the 2022 budget. In other words, not ending the subsidy would necessitate austerity in an economy where government spending accounts for just 6 percent of GDP.”

Read also: Five most indebted states owe N1.65trn

As a result, the EIU said it would revise up its fiscal deficit projection of 5.3 percent of GDP in 2022 to closer to 6 percent of GDP.

“In 2023 we expect the end of subsidies, which is expected to bring the budget deficit down, and in the medium term we expect a gradual rise in the rate of value-added tax from 7.5 percent now to 15 percent in 2026.”

In a related development, the Federal Executive Council (FEC), on Wednesday, approved the 2023 2025 MTEF-FSP.

The finance minister disclosed this while briefing State House correspondents after the virtual meeting of FEC, presided over by President Buhari.

The 2023-2025 MTEF- FSP, contains several assumptions including crude oil price of $70 per barrel for 2023, $66 for 2024 and $62 for 2025.

MTEF- FSP is a transparent planning and budget formulation process, prepared by the Cabinet and is expected to guide federal government agencies establish credible contracts for allocating public resources to their strategic priorities while ensuring overall fiscal discipline.

With the approval by the council, the document will be sent to the National Assembly for approval before the preparations of the 2023 budget estimates.

Ahmed said: “Crude oil production is projected to be 1.69 million bpd for 2023 and 1.813 million bpd for both 2024 as well as 2025.

“We have also projected that in the nominal GDP, the size of Nigeria’s economy will rise up to N225.5 trillion with 95 percent of this contribution by the non-oil sector while the oil sector will contribute only 5 percent, in 2024.”

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