The rising domestic debt service which stood at N1.48 trillion in 2017 is raising concern among financial analysts who see capital projects bearing the brunt.
The 2018 budget projects a combined total of N2.01 trillion for domestic and external obligations, but that excludes sinking fund contributions for the settlement of arrears to contractors and other private-sector creditors, FBNQuest noted.
Looking at the impact of this on the economy, Gregory Kronsten, head, macroeconomic and fixed income research at FBNQuest said, “the diversion of resources that could be deployed by the government elsewhere such as capital projects for example”.
Also, he said rising domestic debt service usually increases the interest rate the borrower pays. Domestic obligations account for about 90 percent of total debt service.
A chart by FBNQuest shows that the payments peak in the first and third quarters. Meanwhile, five of the six largest bond issues were launched in the first quarter. “The exception is the July ‘34s, expanded to a size of N1.08 trillion under the restructuring of state governments’ debt”.
The analysis of the data from the National Bureau of Statistics (NBS) on the revenue allocated to the Federal Government of Nigeria (FGN) from the Federation Account Allocation Committee (FAAC) for the Q1 2018 and the data from the Debt Management Office (DMO) on the interest payment on the domestic debt of the FGN for the same period shows that the ratio on the interest payment relative to the revenue is very high at 79 percent. The average for the last two years stood at 60 percent.
“This is high also. The implication of this situation is that the FGN will have little resources left to execute the relevant projects that will improve the productive capacity of the economy. Thus, the economic recovery may remain weak for an extended period of time”, said Ayodele Akinwunmi, head, research, FSDH Merchant Bank Limited.
The stock of the Federal Government’s domestic debt increased by N610 billion to N12.58 trillion in the 12 months to March 2018.
Ayodeji Ebo, managing director, Afrinvest Securities limited said on phone that capital expenditure is always at the receiving end.
He said government should ensure that any major borrowing is channelled into more productive sector and not just recurrent expenditure.
“We are not party to the FGN’s interest rate assumptions. Our calculations arrive at an average cost of domestic borrowing of about 13.2 percent in the period, based upon total annual payments and the stock of debt at end-September. The same calculation made on the basis of the end-December figures gives us an average of 12.3 percent”, said analysts at FBNQuest.
This is not to be confused with an average interest rate since about 25 percentof the stock consists of Nigeria Traesury Bills (NTBs), which do not pay a coupon.
“That said, our impression is that the FGN has allowed itself a little “wiggle room” because it framed its proposals before the start of serious yield compression last year. Additionally, the new budget shifts the thrust of deficit financing to external sources (N850bn vs N1.07trn in 2017) from domestic (N790bn vs 1.25trn)”, the analysts said.
