The International Monetary Fund (IMF) has raised concerns over Nigeria’s rising debt portfolio, warning that the cost of servicing the country’s debt could rise to 35 per cent of revenues in the next four years. According to the 2015 budget, the government will be spending 26 per cent of the entire N3.6 trillion budget on servicing debt.
The cost of servicing debt has been on the increase in the past three years and the proposed increase in debt service expenditure is 32.4 per cent compared to 20.3 per cent increase in the 2014 Budget estimate.
The IMF in its latest staff report on Nigeria stated that the extent of the debt servicing burden means prudent management of debt should remain a policy priority. “While the overall debt burden would remain contained under stress, the interest burden would increase further by an additional 4 percent of revenues bringing the total burden to around 40 percent of revenues.
“Consequently, to ensure sufficient space to finance desired investment, the authorities should continue to follow a prudent approach to borrowing, remain vigilant to the trade-offs between cost and risk, and ensure the proceeds from borrowing is managed to secure the maximum return on investment” the Staff Report advised.
Highlighting that vulnerability has been the recent deterioration in market conditions, the Fund said Nigeria has underperformed in the international markets, just as conditions in the domestic market have also deteriorated, with yields having increased by around 280 basis points since September.
The Fund also noted that the proportion of foreign currency debt is anticipated to increase to about 40 percent. “This would add significantly to exchange rate risk. In contrast, the goal is to reduce refixing risk in the domestic debt portfolio by reducing the proportion of short-term debt to 25 percent of the total from 36 percent currently, which coupled with more external debt would result in an overall reduction in refixing risk.
“Simulating a medium-term financing strategy consistent with these goals, and taking account of current market conditions and projected economic environment, indicates that debt will remain contained to about 11 percent of GDP by 2019. In particular, this strategy envisages an increase in external borrowing from all sources.