The latest quarterly data releases from last week allow us to take stock of Nigeria’s debt metrics. Public debt according to the definition of the Debt Management Office (DMO) amounted to NGN38.0trn at end-September, equivalent to 22.6 per cent of GDP for the 12 months to Q3 ’21. If we add back the obligations of the CBN, we come to about 35.0 per cent per the estimates of Moody’s.
These are stellar figures and reflect the very extensive debt relief Nigeria secured in the 1990s and 2000s. They compare very favourably with those of Nigeria’s peers. Ghana’s public debt represents 79 per cent of its GDP, and the average in sub-Saharan Africa last year was 57 per cent. All said, this is not the most useful ratio although it is the most quoted.
Debt service, of course, is paid by the FGN from its revenue collection, and here the picture is much worse. We see from the Budget Office’s Implementation Report that total debt service including interest payments on the Ways and Means advances from the CBN totalled N2.02trn in H1 ’21, and that total inflows to the federal budget in the period reached NGN2.31trn. This gives us a ratio of 87 percent, which would be more alarming still if we calculated on the basis of total tax revenue rather than total inflows. The budget projects a ratio of 50 percent, which for some reason excludes payments on the CBN advances from debt service. The advances do not qualify as public debt until they have been securitized, which awaits the go-ahead from the National Assembly, but they still have to be serviced from FGN resources.
The burden is growing at a rapid rate, from NGN1.13trn in H1’20. Once it has met its debt service obligations, the FGN has limited revenue for its other spending commitments. This leads directly to mounting deficits, which the FGN contains by reining in its capital programmes. In common with its counterparts elsewhere, the FGN views arrears in salary payments to its employees as a last resort.
The federal finance minister has set an aggressive target for the total government revenue/GDP ratio of 15.0 per cent by 2023. The latest actual figures for gross federally collected revenue (i.e. before distribution to the three tiers of government) are 6.7 per cent in 2019, declining predictably in the year of Covid-19 to 5.9 per cent. The ratio would improve dramatically with robust GDP growth over several years, a hike in tax rates (such as for VAT), and a transformation in coverage/compliance.
Banks are reluctant to lend to the vast majority of state governments due to legitimate concerns around their repayment capacity
We see only incremental progress on the back of efficiency gains and, hopefully, the closing of loopholes and exemptions. We do have reservations around the strength of the political will to take on vested interests. We are also waiting to see the fiscal impact of the Petroleum Industry Act. Turning to individuals and households to tax, their number has declined under the pressures of Covid, which led the World Bank to declare that there are now more people living in extreme poverty in Nigeria than in India. This is a structural flaw in the Nigeria credit story, for which we cannot identify a short-term solution.
Trawling through the DMO’s releases, there are several other points worth making. On the positive side, the DMO has been able to push out the average maturity of its naira-denominated market debt such that almost 74 per cent consisted of FGN bonds at end-September.
Read also: Debt has helped Nigeria rebound from economic shocks – DMO
Another positive is that close to 60 per cent of the FGN’s external obligations are due to official creditors on concessionary terms even though it raised USD4bn from the sale of Eurobonds in the quarter. This has made Eurobond holders as a group the leading external creditor, followed by the World Bank Group, Exim Bank of China and the IMF. We understand that the FGN plans to deploy its allocation of SDRs from the Fund in August as an external financing item in its 2022 budget.
A less positive point emerging from the data is that the domestic debt of subnationals was virtually unchanged at NGN4.20trn at end-September from NGN4.19trn nine months earlier. Banks are reluctant to lend to the vast majority of state governments due to legitimate concerns around their repayment capacity. Lagos State alone can tap the naira bond market although these obligations are not included in the series on domestic debt.
The DMO’s ceiling for the public debt/GDP ratio has been raised from 25 to 40 per cent. This will accommodate both the Ways and Means advances and the AMCON bonds issued by the CBN. While the numbers still look good, our concern is that the FGN is not getting sufficient bang for its bucks. Some of the borrowing has been tied to development of the weak hard infrastructure. We would like to point to completed projects and a direct pass through to new investment. However, we must settle for evidence of incremental improvements across the economy.
Kronsten is a consultant at FBNQuestSecurities
