Nigeria’s public debt rises by N12.6trn in three months on naira depreciation

… domestic borrowings hits 53%

Nigeria’s public debt stock surged by N12.6 trillion between March and June 2024 amid continued depreciation of the naira which has remained pressured despite the Central Bank of Nigeria’s efforts to shore up the local currency.

This spike in the nation’s debt burden now puts the total debt at N134.3 trillion, according to the most recent data published by the Debt Management Office (DMO).

“The modest rise (in Nigeria’s public debt stock) was driven by two factors. The first is the depreciation of the naira, which added about NGN5.9trn to the total debt stock,” said analysts at Lagos-based FBNQuest Capital Research in a note on Tuesday.

The analysts explained that the exchange rate used to convert dollar-denominated debt to naira was NGN1,470.2/USD compared with NGN1,330.3/USD in Q1 ’24.

“An additional contributing factor is due to fresh borrowings from the domestic market.”

A further probe into the DMO’s data revealed that Africa’s fourth largest economy has as much as N63 trillion ($43 billion) as its foreign debt, accounting for 47 percent of the total debt stock.

The Federal Government of Nigeria (FGN) took the lion share, borrowing approximately N56 trillion while the 36 states plus the Federal Capital Territory (FCT) has N7 trillion as their external debt.

A more cursory look at the data showed that the Nigerian government relied more on domestic borrowings as it accounted for 53 percent of total debt profile, with the FGN taking N66 trillion and state governments having N4 trillion as their debta.

Nigeria’s debt stock has grown from 53 percent recorded in Q1 to 58 percent in Q2, defying the DMO’s self-imposed public debt ceiling of 40 percent, as outlined in the agency’s Medium-Term Debt Management Strategy.

Although the current public debt-to-GDP ratio is slightly below the IMF’s 60 percent benchmark for emerging market countries, the nation’s weak revenue profile and FX volatility risks could further escalate debt levels, straining the already strained economy.

“By 2026, we project the debt stock will reach N185 trillion,” said Esili Eigbe, director at consulting firm, Escap Management Ltd, said in a previous report by BusinessDay.

“Despite this, authorities seem unfazed, citing a lower debt-to-GDP ratio compared to global peers.

“However, the focus should be on the debt-to-government revenue ratio in our opinion, which places Nigeria among the countries least capable of repaying their debt,” Eigbe said.

Rising public debt means elevated debt-to-service cost

With Nigeria’s public debt stock rising, debt-to-service ratio will remain elevated. This means that a large percentage of the government’s revenue which should be used for capital expenditures will be portioned to pay off the debts.

For instance, debt service costs surged by 69 percent year-on-year to NGN6.0 trillion in the first six months of this year, consuming about half (50 percent) of FG’s aggregate expenditure, highlighting the significant burden of debt obligations on the government’s finances.

The debt service cost implies a debt-service-to-revenue ratio of 162 percent, up from the 128 percent reported in H1 ’23, indicating the considerable portion of government revenue set aside to meet debt commitments.

Analysts have expressed concerns over the rising debt levels, warning that it could trigger a debt crisis for a country that’s reeling from its worst cost of living crisis in a generation.

“Rising debt levels put Nigeria at serious risk of a debt crisis,” Eigbe, who was cited earlier said.

A debt crisis has severe implications for Nigeria. It would trigger a naira devaluation, credit downgrade, economic fragility, higher borrowing costs, persistent inflation, loss of investor confidence and social unrest.

FG aims to double revenue, slash borrowings through tax reforms

The Nigerian government, knowing that it has a shortage of revenue and ballooning debt profile, sees proposed changes in its tax laws helping to significantly boost revenues, as the West African nation seeks to control its widening deficit and borrowing costs.

Taiwo Oyedele, the head of the government’s tax reform committee, recently said in an interview that the reforms would lead revenue to “double within the next two to three years” as a share of gross domestic product. “If we are moving from 9% to 18%, that means we are doubling it.”

In what seems to be a corollary, analysts at FBNQuest Capital Research anticipate an improvement in the nation’s fiscal purse due to exchange rate gains and ongoing efforts by the FG to increase non-oil revenue.

“However, we expect to see a rise in Nigeria’s debt burden due to extensive government spending and higher naira costs resulting from the Naira devaluation,” they said.