The curate’s egg that is the Nigeria debt story

Some familiar themes emerge when we scrutinize the latest quarterly data releases for FGN and public debt for March 2022. Public debt, consisting of the obligations of the FGN and state governments according to the definition of the Debt Management Office (DMO), amounted to N41.6trillion or 23.3 percent of GDP for the 12 months through to Q1 ’22.

If we adjust this total for lending by the CBN, which is principally the rapid expansion of its role in development finance in the era of Covid-19, we arrive at a debt stock ratio of a little over 30 percent.

This compares very favourably with the ratios for Nigeria’s peers, which reflects the good terms the FGN negotiated on the cancellation and buyback of its non-performing Paris Club debt with G8 in 2005. While many qualified observers including a former CBN governor have their doubts about the usefulness of debt stock ratios, the headline figure looks good. Unlike Ghana and Kenya, for example, Nigeria does not feature as vulnerable in the current analyses of debt sustainability in the EM universe.

Another positive in its debt metrics is the ability of the DMO to sell naira-denominated bonds with long maturities to pension funds (PFAs) and domestic institutions, and thus diminish rollover risk. At end-March such bonds represented 71 percent of FGN domestic debt. There is an obvious price to pay in the form of a mounting interest bill.

The FGN’s domestic interest bill is rising (rather than soaring): N669 billion in Q1 ’22, compared with N613 billion in the year-earlier period. Its 2022 budget, the original version before the supplementary to accommodate the volte face on fuel subsidies, projected total debt service of N3.88trillion including N2.51trillion on domestic obligations.

However, this excludes the servicing of its Ways and Means advances (its overdraft with the CBN). The Budget Office’s latest Implementation Report shows that interest on these advances totalled N916 billion in January-September 2021 on top of ‘conventional’ total debt servicing costs for the period of N2.50 trillion. The interest expense on these advances is higher than that on staple FGN bonds.

The size of these advances is unclear although we can assume that the burden is mounting, given the FGN’s fiscal expansion and the hit to revenue collection from Covid-19. The CBN’s latest statement of assets and liabilities (for December 2019) is not informative on the subject. The figure was about N10 trillion in February 2021 when the DMO proposed their conversion into 30-year CBN bonds with a two-year moratorium.

The advances do not constitute public debt until their securitization, which requires the go-ahead of the National Assembly. Whenever they are included, the ratio for the public debt stock will still be below the DMO’s current ceiling of 40 per cent of GDP. The CBN governor and federal finance minister are said to have pledged that the practice would cease when the FGN tapped the IMF’s rapid financing instrument (RFI) for support in the face of the pandemic in April 2020. The advances are a useful fiscal policy tool, we must acknowledge.

Since no government wants to delay salary payments to its employees, the rising interest bill is a constraint on capital items. Returning to the Budget Office reports, total debt service including the advances amounted to 97 percent of total inflows to the federal budget in January-September 2021. Nigeria’s well-documented infrastructure deficit is unlikely to narrow in these circumstances.

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The solution is to boost the inflows. The finance minister has projected a total government revenue/GDP ratio of 15.0 percent by 2023. The latest CBN data for gross federally collected revenue (before distribution to the three tiers of government) show outturns of 5.9 percent in both 2020 and 2021.

The journey to the target would require, inter alia, a rise in tax rates such as for VAT, a dramatic turnaround in compliance, a sharp reduction in exemptions and waivers, and a change in taxpaying culture. The more we can identify tangible improvements to our state-funded amenities, the more likely we are to meet our obligations.

The FGN’s external balance sheet remains good enough to tap the Eurobond market, where it raised $1.25 billion in March with a seven-year issue at 8.375 percent. It came close to tapping it again in Q2 but chose to stand back due to market conditions. Further tightening is coming from the US Federal Reserve but we doubt portfolio investors will shun the Nigeria credit although they will become more selective. Almost 60 percent of public external debt is due on concessional (non-market) terms. Further, Nigeria is not beholden to China, which accounts for just 9 percent of total external debt.

We can see from the above that little has changed in the Nigeria debt story. The FGN has access to loyal buyers of its market debt, both domestic and external, and can borrow from the usual official creditors. That said, it needs to transform its revenue collection, which is the worst globally according to World Bank data, so that it can invest heavily in its infrastructure and boost growth as well as pay its creditors. Its credit story in our view is in slow but not terminal decline.

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