From the potholed and often barely-paved streets of cities to the precarious and accident-prone highways of Nigeria’s interior, foreign investors visiting Nigeria are reminded repeatedly of the country’s urgent need for capital.
Many of them continue to be willing lenders, despite the signs that their money may not always have been put to the most productive use.
Increasingly, however, analysts are raising questions over the proceeds of bond sales — and whether the public finances of the biggest economy in Africa, according to the IMF, are as sustainable as they appear.
“They have borrowed quite a bit, but where is the money being spent?” asks Andrew Roche, managing partner of Finexem, a Paris-based financial consulting firm.
He worries that the government has been using borrowed cash to patch up holes in budgets, rather than investing in infrastructure or industry, or in efforts to diversify the economy from a heavy dependence on oil.
In a world of cheap and abundant money, Nigeria has been among the big beneficiaries of a global hunt for yield.
The country sold its sixth eurobond last November, raising $2.9bn in maturities of seven, 12 and 30 years in an issue that was more than three times oversubscribed.
Demand is strong in local markets, too. On April 25, the government raised 100bn naira ($326m at the official rate) in an auction that included a debut 30-year local currency bond that was four times oversubscribed.
Yet, Mr Roche says, some investors may have overlooked some worrying metrics.
In a presentation to investors in Washington last month, Zainab Ahmed, finance minister, stressed that Nigeria’s government debt, while it has risen in recent years, was still equal to just 19 per cent of gross domestic product in 2018.
That is well below the average for emerging markets of just under 50 per cent of GDP, according to the Institute of International Finance.
But the same presentation shows that the amount spent on servicing government debt, while it has fallen as a share of the government’s gross revenue collection, has risen to an alarming two-thirds of revenues retained by the central government after it has distributed funds to the states, as mandated by Nigeria’s federal system.
That is a pot from which debt repayments — and all other federal spending — must be made. Ravi Bhatia, a sovereign analyst at S&P Global Ratings, says the problem is best understood the other way round.
“The issue is not so much that interest payments are high,” he says.
“The main problem is that federal revenues as a share of GDP are just very low. They are literally reliant on oil and little else.”
Indeed, IMF data show that Nigeria’s general government revenues were equal to just 5.7 per cent of GDP last year, far below the average of 22 per cent of GDP for the other 44 sub-Saharan countries for which the IMF collects data.
Ms Ahmed stressed in her April presentation that revenue generation was her priority. She also recognised that last year, actual revenues fell short of the budget target by almost 30 per cent.
“Peer comparisons of our ability to convert GDP to revenue for capital and social investment . . . show that we have a lot to do,” she said.
In its latest report on Nigeria published last month, the IMF also emphasised the need for “revenue-based consolidation” to lower the ratio of interest payments to revenue and said “non-oil revenue mobilisation” should be the top priority in “an urgent reform package”.
Yet big questions remain about how that might be done.
One of the government’s stated priorities is to raise more revenue through value added tax, which generates the equivalent of just 0.8 per cent of GDP according to Ms Ahmed’s figures, compared with 7 per cent of GDP in South Africa and 6.6 per cent in neighbouring Benin.
Raising the rate of VAT, however, has met resistance. “The economy is suffering, so to slap on another tax will not be very popular,” says Mr Bhatia at S&P.
“Hence the reluctance in pushing it through. Essentially, [President Muhammadu] Buhari is not a big reformer — he’s a slow-moving, cautious reformer, if at all.”
Charles Robertson, chief economist at Renaissance Capital, an investment bank that specialises in emerging markets, argues that to develop a large manufacturing sector any emerging economy needs electricity, adult literacy and investment.
But he also argues that, while the first two of those take time to deliver, the third can be used to kick-start growth, as has happened in Ethiopia.
While that east African country has a smaller manufacturing sector than Nigeria, it has a much higher level of investment — the equivalent of 38 per cent of GDP last year, according to the IMF, compared with just 13 per cent in Nigeria.
Ethiopia’s GDP growth came to 8.5 per cent, more than four times that of Nigeria.
Mr Robertson says one impediment to foreign direct investment in Nigeria is the uncertainty generated by the government’s system of multiple exchange rates.
While the government and some favoured businesses have access to the official rate of 306.95 naira to the US dollar, others must use a separate managed rate, currently about 362 to the dollar.
“There are a host of reasons not to put FDI into Nigeria,” he says, “but unifying the exchange rates would help to normalise the country.”
One danger of Nigeria’s managed floating rate, he notes, is that the currency can become artificially overvalued.
He estimates that “fair value” for the naira is about 440 to the dollar, and will be about 470 by the end of the year, opening a discount of about 30 per cent to the managed rate.
“The danger is that eventually you get a huge difference in valuation where you suddenly have to halve the currency in value,” he says.
For now, many investors are willing to take that risk because of the high returns.
A local currency 12-month Treasury bill, for example, currently pays annual interest of 12.75 per cent.
“In the long run, it’s a problem,” Mr Robertson says. “But investors are saying, ‘is this going to go wrong in a year?’ With oil at more than $60 a barrel, they feel the answer is no.”
Jonathan Wheatley, FT