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Nigeria’s fiscal headache goes from bad to worse

…as debt service could top 100% in Q2

Nigeria may be facing a deeper fiscal crisis than expected with data from the budget office showing that the Federal Government spent N99 of every N100 earned paying interest to creditors in the first quarter of 2020.

The data show that while the Federal Government earned N950 billion in the first quarter, it spent as much as N943 billion servicing debt within the three-month period. That puts the government’s debt service costs as a percentage of revenue at 99.2 percent, the highest since at least 1999.

The figure is up from an estimated 60 percent in 2019, 60.1 percent in 2018, 61.6 percent in 2017, and 44.6 percent in 2016.

Nigeria’s debt service cost is rising at a time when the government is faced with a double whammy in the form of lower oil prices and the coronavirus pandemic.

Oil revenue, which contributes more than half of government revenue, is projected to slump 80 percent, according to government’s projections, while the economy could contract by between 3.5 percent and 8.9 percent.

The impact of lower oil prices and the coronavirus-induced lockdown which affected the country’s oil and non-oil revenues only took a soft toll on government in the first quarter.

“The real impact of low oil prices and the COVID-19 didn’t kick in until the second quarter. I believe the debt servicing costs got worse in Q2,” said Ayodeji Ebo, managing director at Afrinvest Securities.

“This means the Federal Government doesn’t have room to borrow as much and needs private capital now more than ever,” Ebo added.

The biggest implication of rising debt service costs is that the government will increasingly find it hard to implement capital projects needed to boost economic growth.

It also limits how much the government can spend on essential services from education to health.
“Nigeria is faced with a fiscal crisis, that’s the best way to describe it and it does explain the rush to go to the IMF,” one economist said.

As at Q1, the Federal Government’s revenue was 52 percent below the budget target but expenditure powered on only 2 percent down.

“This happened before the real effects of the collapse in crude oil prices hit the budget. Oil income was only down 30 percent from the budget target,” the economist said.

“It also makes me believe that the higher debt service cost has something to do with regularising the debts owed to CBN which had previously been hidden from the budget,” another economist said. “In Q2, when the full oil price impacts should hit revenue, it is going to be something to behold.”

According to the data by the budget office, the country earned N950.5 billion in revenue compared to a prorated budget of N1.9 trillion, representing a whopping shortfall of 52 percent.

Oil revenue was N464 million, representing a shortfall of 30 percent when compared to budget, while non-oil revenue was N269 billion representing a shortfall of 40 percent.

Despite the revenue shortfalls recorded, government recurrent expenditure (debt and non-debt) remained in line with budgetary expectations. According to the data, debt service for the first quarter of the year rose to N943.1 billion divided into domestic debt (N594.23 billion), Foreign Debt (N129.51), and Interest on Ways and Means (219.38 billion), respectively.

Recurrent non-debt expenditure was N1.1 trillion, largely in line with budget expectations. However, actual capital expenditure was N139.7 billion, 71.3 percent off target.

Nigeria’s fast depleting revenue continues to raise questions around the solvency of the Nigerian economy. It also queries the government’s real capacity to borrow.

Debt sustainability is typically explained using either debt to GDP or debt service to revenue ratio.
With Nigeria’s total public debt below 30 percent of GDP, the country’s debt burden appears to be relatively light compared with many other countries.

Meanwhile, debt-to-GDP is not regarded as the best indicator of debt sustainability, especially in a country where tax-to-GDP is low. For Nigeria, a better indicator of debt sustainability is the debt service-to-revenue ratio, which in Nigeria has in recent years risen to levels analysts say is worrying.

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