Nigeria’s plans to rebase its economy could potentially see its rising debt as a share of gross domestic product (GDP) fall to at least 40 percent, a situation that could increase fiscal sustainability.
“Whilst Debt to GDP for Nigeria was 56.23% as at June 2024, the recent GDP rebasing exercise is expected to push this ratio to 40% area, thus providing a suitable debt sustainability buffer,” Lagos-based Renaissance Capital Africa said in a report.
The investment bank and research firm noted that Nigeria has a low government revenue as a percentage of GDP which stood a 14 percent, placing it amongst the weakest globally. “The ratio will shrink with the GDP rebasing.”
The country is expected to release reports from its consumer price index (CPI) and GDP exercise due last month in a move to put into account certain developments given the current realities after over a decade left unrevised.
Read also: Nigeria’s GDP rebasing : What you need to know
The National Bureau of Statistics had in a session in January said the revaluation of the country’s economy will see tax-to-GDP and debt-to-GDP ratios decline, allowing for more fiscal balance while per capita income which is about $877 will improve.
In its report, Renaissance Capital Africa said Nigeria’s debt levels appears to be relatively okay using the International Monetary Fund (IMF) standards. It however warned that the conventional IMF measures are not a true reflection of debt sustainability.
Data from the Debt Management Office (DMO) revealed that Nigeria’s debt stock increased by N8.02 trillion to N142 trillion in the third quarter of 2024, representing a 5.97 percent increase from N134.3 trillion recorded between April to June last year.
The continued surge in debt, experts say, is driven by the depreciation of the naira that has continued to affect the country’s cost of external obligations.
“Nigeria’s debt position continues to expand as a policy of borrowing to spark growth is pursued. Whilst positive in the short term, the rapid expansion of both external and domestic debt is happening at relatively high rates given current global and domestic macroeconomic conditions,” Renaissance Capital Africa said.
Read also: Nigeria’s debt stock surges to N142trn on weak naira
The report made known that the country’s rising debt is exacerbated as a result of constrained revenue growth — lower collections from oil and non-oil sources — higher Federal Government aggregate expenditure, and the result is continued deficit financing.
While Africa’s most populous nation is grappling with piling external obligations that are tanking its net reserves, its debt service pressures are mounting.
According to the report, the pressures on debt service have been evident since 2023, with debt service to federal government revenue surpassing 100 percent in 2023 and expected to remain in the same context in 2024.
The rate of growth is also rapidly expanding with debt service as of June 2024 rising by 38 percent to N3.419 trillion from N2.479 trillion as of March 2024.
“As borrowing by the Federal Government, its Ministries and Agencies increases, the velocity of increase is expected to also expand.
“There is certainly a need to reduce borrowing – particularly from commercial and bilateral sources, increase revenue and allow more equity participation in infrastructure projects,” it said.
Turning the tides lies in shooting up revenue base and lowering recurrent expenditure as this will allow for less new issuance and the early prepayment of highly priced loans in the immediate term.
“The ability to also reduce dependence on both domestic and international funding markets also arises from higher revenues,” the report stated.
“This is however a medium-term structural focus and in the short term the pressures are very evident. There is a need to reduce debt service, and this can be done conventionally (debt re-profiling) or non-conventionally (financial repression) with each solution impacting investor classes differently.”
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