…US$6.95 billion in interest to be paid to corporate creditors. Multilateral creditors $3.24 billion
…Nigeria’s debt is unsustainable, experts warn
Barring any change in plans, the federal government will spend a total of $10.19 billion over a decade spanning 2021 and 2030 to service the country’s external debt, figures from the Debt Management Office have revealed.
The amount when converted using the parallel market exchange rate between the naira and the dollar is approximately N7.2 trillion.
The federal government’s huge appetite for borrowing under President Muhammadu Buhari’s government had worsened the debt position in the first quarter of this year as the country’s debt rose by N2.04 trillion to N41.6 trillion in the first three months of this year.
The N41.6 trillion represents a quantum leap from the N39.56 trillion debt figure the country recorded in December 2021.
The Debt Management Office and Treasury Secretary had come under a series of attacks from pundits and major business players over the country’s mounting debt.
Nigeria’s debt service as a percentage of gross domestic product had reached 73 percent, based on figures released by the Treasury Ministry in October last year.
But despite the fact that Nigeria’s debt-to-GDP ratio is one of the highest in sub-Saharan Africa, senior government officials have claimed that the country’s debt profile is still within manageable limits.
But investigation through THE PIPER revealed that between 2021 and 2030, a large portion of the country’s revenue would be expended on debt servicing obligations.
The data showed that of the $10.19 billion to be used for debt servicing, about $6.95 billion, or 68.2 percent, would be spent servicing the commercial portion of the external debt burden, while the balance of $3.24 billion or 31.79 percent is forecast for paying interest on multilateral debt obligations.
Further analysis of DMO figures showed that of the $6.95 billion projected for commercial debt servicing obligations, about $6.9 billion, or 99.5 percent, was spent servicing Nigeria’s Eurobond creditors while the remainder of $25.28 million is earmarked for servicing diaspora bonds.
Nigeria returned to the Eurobond market in 2021 and has issued $15.9 billion worth of bonds, 39.8 percent of the stock of external debt, according to the DMO.
The government’s unsettled preference for Eurobonds at high interest costs and the associated exchange rate risk could hurt Nigeria sooner than expected.
For multilateral creditors, the DMO plans to service the African Development Fund (ADF) debt at $114.93 million. African Development Bank (AfDB) $148.06 million, Africa Growing Together Fund (AGTF) $9.48 million, International Fund for Agricultural Development (IFAD) $40.93 million, International Development Association (IDA) 1st $.59 billion and International Monetary Fund $123.36 million.
Also, it is proposed to spend $2.78 million as interest on the loan secured by the European Development Fund (EDF), $0.61 million on the Arab Bank for Economic Development (BADEA) debt, while $8.31 million and $123.71 million to be spent on loans secured by the Islamic Development Bank (IDB) and the International Bank for Reconstruction and Development (IBRD).
Another analysis of data from DMO put the planned interest payment on Nigeria’s bilateral debt at $1.07 billion.
Economic prospects bleak, Nigeria heading for debt crisis – experts
The huge preference for borrowing has led the IMF to name Nigeria as one of the countries likely to face a debt crisis given the staggering N41 trillion public debt as of March 31, 2022.
The fund warned that unless the federal government takes appropriate action to improve revenue generation, all of its revenue could be spent on debt servicing by 2026.
It revealed that interest payments on debt could wipe out all of the country’s revenue over the next four years, based on a macrofiscal stress test it conducted in Nigeria.
Presenting the latest Regional Economic Outlook for Sub-Saharan Africa in Abuja, IMF Representative for Nigeria Mr. Ari Aisen warned that Nigeria risked falling into a critical debt servicing problem unless urgent action is taken to significantly boost revenues .
He explained that over 80 percent of federal revenue goes to debt service.
Aisien said: “The biggest critical for Nigeria is that we have done a macrofiscal stress test and what you are observing is the interest payments as a percentage of revenue and how you are looking at us in relation to the federal government’s baseline what Nigeria’s revenue is projected to be through 2026 almost 100 percent taken up by debt servicing.
“So, the fiscal space or amount of revenue that’s needed, and that’s without accounting for a shock, is most federal government revenue is actually 89 percent right now and it’s going to continue that way if nothing is done to put it in to claim debt service.
“That reflects the country’s low revenues. The country needs to mobilize more revenue to achieve macroeconomic stability. It has become an existential problem for Nigeria.
speaking in an interview with THE PIPERThe Chair of the Chartered Institute of Bankers of Nigeria Abuja Chapter Prof. Uche Uwaleke said the huge sum being spent on debt servicing could pose a major threat to the economy.
He said: “We’re spending so much of our earnings servicing debt and if that happens what does that mean? You have very little for what you want to do. If you have N1 spends, it means you have 20 kobo for it. So developing capital projects counts because it leaves you with very little left over and debt servicing.
“That’s why the government hasn’t defaulted every year. The government will always be servicing debt, so we have very little left, and so you tend to see us in a state of perpetual borrowing.
“You have to borrow to survive because when you make money, you use it to service debt, and that’s how you end up refinancing. Refinancing means you borrow money to service your debt. So that’s our situation and I’ll say the debt service to revenue ratio is really a problem and that’s why you sometimes hear the Treasury say we have a revenue problem.”
He suggested that since the government is not generating enough revenue, it is time to adopt a cost-cutting strategy to reduce administrative costs.
He added: “We don’t earn enough because if we earn enough the amount we spend servicing the debt wouldn’t be a problem, but because the earnings aren’t as high as they should be, we give what little we can earn, from debt service. So it’s a challenge.
“If you add the debt the government owes the central bank over N10 trillion, that also tells you we have a higher number. So the debt level is quite high, there is no doubt about that.
“My concern about the debt level is really, if you look at the composition, now let’s go to what we should do, I think we should focus more on concessional lending. Loans come from multilateral sources, the World Bank, the International Monetary Fund, the African Development Bank and possibly bilateral sources. When we borrow, we should focus on concessional rather than commercial debt.”
Registrar of the Chartered Institute of Finance and Control of Nigeria, Mr Godwin Eohoi, said that given that the federal government spends about 70 percent of its budget servicing the country’s debt, any further plan to raise the country’s debt profile would create a debt crisis could lead .
He urged the government to stop borrowing to avoid the current situation where a large part of the country’s annual budget is spent on debt servicing.
“Currently, we are still servicing debt and using up a large portion of the annual budget to pay off debt. This is serious because the money you would have used for other things is now being used to pay down debt.
“The debt is still mounting and the maintenance we are doing is quite large. We spend over 70 percent of our budget on debt servicing. We should not even accumulate more debt than what we currently owe.”
But the chief executive officer of the Center for the Promotion of Public Enterprises, Muda Yusuf, said Nigeria may be on the brink of bankruptcy due to low revenue generation.
He said the huge burden of paying fuel subsidies and tax leaks are among the factors unmasking the country.
He said: “The debt service to revenue ratio for the first four months of the current year is over 100 percent. This implies that actual government revenues during the period are insufficient to service the debt.
“Therefore, the funding of government operations – staff costs, overheads, capital expenditures and even some debt servicing – must be done through additional borrowing. This points to serious vulnerabilities for the Nigerian economy.”
Yusuf added that the near-term fiscal outlook will be clouded by heightened downside risks, mainly due to the huge burden of fuel subsidy financing, tax leaks and an unsustainable government debt trajectory.
“The outlook poses significant risks to macroeconomic stability amid heightened inflationary pressures, currency depreciation and increased exchange rate volatility,” he added.