Nigeria’s rising debt service cost may affect the country’s debt servicing ability, credit rating outlook and borrowing cost, a new report by PwC Nigeria has said.
In its latest 2024 Nigeria Economic Outlook report, the professional services firm projected that debt service could rise from N8.25 trillion in 2024 to N9.3 trillion in 2025 and further to N11.1 trillion in 2026.
“With a high debt servicing to revenue ratio, the government aims to increase domestic debt in 2024 to meet its deficit funding requirements,” the report said.
It said the shift towards more domestic borrowing could impact the private sector, as government credit constitutes 37 percent of net domestic credit, which saw a 28 percent increase from January to September 2023.
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“Additionally, Nigeria grapples with a low domestic credit-to-GDP ratio of 12 percent in the first quarter of 2023, lagging behind countries like South Africa, Egypt, and Morocco.”
Authors of the report also highlighted that the country’s deficit has grown by 370 percent from 2015 to 2023, which has led to a high debt and debt servicing profile.
“Though debt stock to GDP is comparatively low at 37.1 percent, the debt servicing to revenue ratio remains high at 124 percent as of the first half of 2023. In 2024, the government aims to reduce the budget deficit to around 3.9 percent (N9.18 trillion) of GDP, down from 6.1 percent in 2023, through reduced spending,” they said.
Over the past nine years, the actual cost of servicing debt has been more than the budgeted amount.
BusinessDay analysis of the available data from the Budget Office of the Federation and BudgIT, a Nigerian civic organisation, shows that it rose to N5.79 trillion in the first nine months of last year from N908.9 billion in the same period of 2015
Adeola Adenikinju, professor of economics and president of the Nigerian Economic Society, said much of the country’s debt is not spent on things that can pay for themselves or can lead to capital for development.
“You will find out in the future that we will be depicting what is available for the future generation to finance the debt that we have incurred in the past,” he said.
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Africa’s biggest economy has seen its public debt grow steadily to levels that have left many worried as government revenues remain low. Its debt-to-GDP ratio was increased from 25 percent to 40 percent in 2021.
Debt service costs gobbled up 96.3 percent of government revenue in 2022, up from 83.2 percent in the previous year, according to the World Bank.
As of September 2023, debt service was N5.66 trillion, representing 40 percent of aggregate expenditure and 64 percent of revenue, Atiku Bagudu, minister of budget and economic planning said while presenting the highlights of the 2024 budget proposal.
He said the debt service cost exceeded the budget by N1.68 trillion mainly due to interest on Ways and Means of N1.89 trillion and generally higher interest rates on borrowings.
The Debt Management Office said in September that the total public debt rose to N87.38 trillion in the second quarter of last year from N49.85 trillion in Q1. It increased to N87.91 trillion at the end of Q3.
A recent report by the United Nations titled ‘A world of debt’ said the growing burden to global prosperity has been translating into a substantial burden for developing countries due to limited access to financing, rising borrowing costs, currency devaluations and sluggish growth.
“Countries are facing the impossible choice of servicing their debt or serving their people. Today, 3.3 billion people live in countries that spend more on interest payments than on education or health. A world of debt disrupts prosperity for people and the planet,” it said.
The PwC report noted that an increase in debt concerns which has led to a lowering of credit ratings may lead to an increase in the cost of international funds.
“This may increase the demand pressure on forex to meet future FX debt service obligations. This is evident in the decline in capital importation from $24 billion in 2019 to $2.8 billion as of Q3 2023. However, an expected lower interest rate environment may balance this out,’” it said.
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The firm also revealed seven key trends shaping Nigeria’s economic trajectory in 2024.
It predicted that investors will be cautiously optimistic, consumers may likely adjust better to the evolving policy and macro realities and the country may witness improved sectoral development riding on reforms.
Others are evolving monetary policy stance to find the right framework and instruments to achieve price stability, undulating pathways to unlocking productivity in the economy, persisting vulnerability to external pressures with the potential of ‘shocks’ and executing fiscal reforms by balancing ambition with budgetary implementation.
“We project a marginal decline in inflation and a 3.1 percent rise in Gross Domestic Product. Achieving sustainable growth in 2024 requires balancing ambitious fiscal reforms with effective budget implementation,” the report said.
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