President Muhammadu Buhari

By Obinna Ezugwu

Nigeria may totter at the brink of financial crisis with the rising rate of debt service which reached an unprecedented 91vpercent of revenue at the end of second quarter. This had embarked on massive borrowing to fund its infrastructure development arguing that there is no alternative to it if the country would move forward.

In 2015 when it came to power Nigeria owed just N11trillion; today the total debt stock is N34 trillion with $5billion more to finance the 2021 budget. Following the recent appointment of Bookrunners, financial advisers for a fresh Eurobond issuance, Afrinvest has asked Federal Government to prioritise expanding revenue base, reduce the size of government officials and ensure proper deployment of borrowed funds to avoid a debt trap.

Africa’s largest economy recorded poor revenue performance in the first five months of the year 2021, according to Budget Implementation Report. However, the nation’s debt book continues to skyrocket while debt service cost lays heavy claim on income generation in a growth-starve economy.

Nigeria barely grew in the first quarter as gross domestic product jumped minuscule, far below population surge conservatively put at 3% per annum on the average. However recent figure suggests a five percent growth in second quarter.

In 2020, the economy shrank by about 2% while the inflation rate and local currency devaluation keep millions of naira below the poverty index. While Federal Government knows how to spend money, it does not know how to generate more due to a lack of strategic policy that drives demand and supply for economic expansion.

Experts say Nigerian government is taking an easy way out due to its low debt to gross domestic product ratio currently below 40% compare to peers in Africa region. Federal government total income varied significantly from expectation by about 45% in the period, while Nigerian Treasury bill worth N1.8 trillion was issued to close earning gap.

However, the recently approved supplementary budget has increased the projected deficit for 2021 despite government revenue miss and overspending. To curb fiscal slippage, analysts at Cordros Capital said in its second half of 2021 outlook that FG should consider structural reform.

But debt service cost has turned a into a nightmare for the country starved with growth as the government expended about 100% generated in the first quarter to service the nation’s debt exposure.

“Nigeria’s key problem is revenue generation, not spending per see. While low debt to GDP ratio considerable point to make when looking at Nigeria from a lens, there is also another factor rarely considered: population surge and low per capita income. Nigeria’s population is growing faster than its economic balance sheet, and that is a problem.”

In the last six years, Nigerian government revenue expectation has continued to underperform. Total income accrued to the nation remains skewed to oil receipt but two key variables (price and oil production volume) that determine earnings in this space are outside FG’s control.

Informed by persistent fiscal slippage, total public debt continues to rise on the back of a persistent budget deficit amidst a heavy capital spending plan.
Nigerian lawmakers recently approved a $6.18 billion foreign currency loan as part of a plan to finance the nation’s budget deficit for 2021 due to revenue strained from the oil and non-oil segment.
The petrol-dollar power economy with more than 200 million citizens would be seeking to raise about N2.5 trillion from the foreign capital market in the second half of 2021.

In the first six months in 2021, FG had raised more than N1.8 trillion from the domestic market while some investment banking firms added that Nigeria’s Central Bank has also kept its vault open for the government.

Meanwhile, Federal Government is expected to get about $3.5 billion from the recent special drawing rights approved by the multilateral lender, International Monetary Fund, in order to stimulate global economic growth following pandemic-induced lockdown.
Afrinvestrecognised that the Eurobond will be used to partly plug the over N6.8 trillion 2021 budget deficit.

The firm said with the approved supplementary budget of N982.7 billion has lifted FG’s total budget for 2021 to N14.8 trillion from N13.8 trillion – translating to an increase of 45.6% over the actual budget for 2020 pegged at N10.1 trillion.

According to Afrinvest review, the supplementary budget comprised of N859.4 billion capital expenditure, designated to boost military operations and facilitate the procurement of 29.9m doses of COVID-19 vaccine.
The balance of N123.3 billion will be used to fund non-debt recurrent expenditures.

“Although the rationale for the supplementary budget is compelling, given the high level of insecurity and weak vaccination – 0.8% of the population-, the weak revenue performance of the FG may result in worsening the debt sustainability in the near term”, Afrinvest said.
According to the 5-month budget performance report from Budget Office, pro-rata revenue suffered a shortfall of 44.6% to print at N1.8 trillion.

This was jointly driven by a 50.0% underperformance in oil & gas revenue as the government earned N462.1 billion, a deficit in non-oil revenue as FG gets N618.8 billion, and a 79.3% shortage in revenues from unsustainable sources including government-owned enterprises which printed at N1.1 trillion.

Interestingly, analysts said FG projected total revenue of N7.9 trillion for 2021, with the largest share in the sum of N3.2 trillion or 40.2% is expected from these unsustainable sources.

“Over the 5 years (2016-2020), debt service to actual revenue averaged 60.0%, rising to 82.9% in 2020. This leaves the FG with just about 20.0% to allocate between recurrent and capital expenditures”, Afrinvest said.

In the first quarter of 2021 alone, FG’s debt stock increased by N2.0 trillion to N28.9 trillion, while revenue in the first 5 months came in at N1.8 trillion. Afrinvest said this translates to a debt-to-revenue ratio of 111% – a trend that may worsen by the end of the Eurobonds and other domestic bonds issuance slatted for the remaining months in 2021.

Going forward, Afrinvest projects FG’s actual revenue for 2021 to settle around N5.8 trillion, a distance away from N7.9 trillion budgeted for the year. The firm also estimates debt service to print around N3.7 trillion compare with N3.1 trillion budgeted: N3.1 trillion.

“This will translate to a debt-service-to-revenue ratio of about 63.8%, as against 35.2% stipulated in the budget. Hence, we recommend that the FG prioritize expanding its revenue base, reduce the size of government to curtail recurrent expenditure, and ensure proper deployment of borrowed funds to prevent falling into another debt trap”, Afrinvest said.