Nigeria shows heavy reliance on short-term inflows to finance deficit

Africa’s biggest economy, Nigeria has been relying on costly hot money flows in recent times to stabilise balance of payment, with the country’s central bank increasingly borrowing at short maturities and high yields to finance government’s deficit.

Oil production capacity constraints, combined with relatively low oil prices have limited the country’s major source of external financing and government revenue. At the same time, Nigeria suffers low revenue mobilisation given its relatively low non-oil receipts, which is below five percent.

As a consequence, chances are high that interest payments currently about 60 percent of revenue, might dominate Nigeria’s budget in subsequent periods, even as the International Monetary Fund has estimated that the figure might surge to 82 percent by 2022.

This means that three years from now, Abuja will spend N82 from every N100 generated to service debt, leaving almost nothing for capital investment.

Analysts at Washington-based Institute of International Finance (IIF) believe that high interest payment will crowd out other spending and will further constraint Nigeria’s ability to expand its productive base, fix decrepit infrastructures and spur growth to stabilize the budget.

Nigeria’s current account has worsened from surplus to deficit ever since the global oil prices crashed in mid-2014. And at the same time, capital flows dried up, resulting in reserve losses. In recent years, current account has remained weak, tumbling almost by half to N1.6 trillion ($5.2bn) in 2018 from N3.2 trillion ($10.5bn) in the preceding year. But hot money flows has picked up, jumping some 61 percent to $11.8 billion in 2018 from $7.4 billion in the previous year (but declined 40 percent to $4.3 billion in second quarter of 2019).

Initially, the flows comprised mostly long-term loans but are now dominated by short-term portfolio debt. Such external financing is needed to fund government deficits, which cannot be absorbed by the domestic banking sector. “This is the case since domestic banks’ assets are heavily concentrated in the oil sector, where bad loans are huge and capital provisions are low,” said analysts at IIF in a note to clients.

Over 75 percent of foreign portfolio flows comes from offshore investors participating in CBN auctions of treasury bills. The auction proceeds are then used by the apex bank to finance government’s deficit shortfall through the buying up of treasury securities.

The gap between Abuja’s revenue and expenditure has partly been financed through the issuance of Eurobonds. This is a relatively recent development with issuance between 2017 and 2018 totaling over $10 billion. Prior to this, such issuance is almost the least among Sub-Saharan African countries that issued dollar-denominated bonds.