Business
Economy: Nigeria battles insolvency as borrowing escalates
Is Nigeria sliding into economic doldrums? This is the question on the lips of not a few economy commentators even as they scan the numbers charts. Even if the response to this question is not in the affirmative, but the fact of the country being potentially insolvent at the moment is not a far-fetched guestimate by many discerning Nigerians and other observers elsewhere who feel that the country’s mountainous debt pile may be dragging it down the hill economically.
The unfolding events did not surprise people when the Governor elect of Anambra State, Prof. Chukwuma Soludo recently expressed discomfort that the country was still not sure if it had what it takes forge ahead economically or was plainly beckoning towards insolvency.
Soludo who expressed this concern in a speech titled, “The purpose and price of disruptive change”, at the graduation ceremony of students of the School of Politics, Policy and Governance (SPPG) said, ‘’Oil is on its way out, but dismantling the decades-old debilitating institutions and politics around it won’t be a tea party. Nigeria is now at a fiscal cliff with a crunching solvency challenge. Youth unemployment, insecurity, poverty, inflation, etc threaten the social fabric. Migrating to a post oil world of the fourth industrial revolution and sustainable prosperity will require massive disruptive transformation and restoration of a productive social contract.”
Of course, the economy of the country appears to be not only in danger, but it appears to be deteriorating daily. Unfortunately, out of the budget of N17trn in 2022, the budget deficit harbours N6.25trn (3.39% of GDP) and this figure will definitely increase given the reinstated funding of fuel subsidy to the tune of N3trn (17.5% of the budget) in 2022. There is consensus that FG must borrow to fund the increased budget deficit.
As government debt continues to increase, this government has accumulated a total debt stock of about N28 trillion in the last six years and is still in the process of accumulating more.
According to the Debt Management Office, Nigeria’s total debt stock stood at N38.004trillion as at September 30, 2021 while the Medium Term Expenditure Framework (MTEF) has outlined that Nigeria will borrow a further N14.8 Trillion between 2022 and 2024. According to the document, the projected figure for 2022 stands at N4.89 trillion. This is further broken into domestic borrowing of N2.44 trillion and N2.44 trillion for foreign borrowing.
Further details show that the borrowing schedule in the three years will increase the public debt of the country from the current figure of N38 trillion to N52.8 trillion by 2024 with total domestic debt at N29.91 trillion and total external debt at N23.05 trillion. Figures on the document also revealed that between 2022 and 2024, Nigeria will spend N14.6 trillion on debt servicing. This is broken down as; N3.6 trillion in 2022, N4.9 Trillion in 2023, and N6.1 Trillion in 2024. Debt service figures will increase by 36.1% between 2022 and 2023 and by 24.4% in 2023 and 2024.
During the same period, the debt service to revenue ratio is projected at 43% in 2022, 48% in 2023, and 57% in 2024. Many worry however that these projections can only work on paper and not realistic.
Whereas many analysts believe the Countries total debt may hover between N40trn to N45trn before the end of 2022, debt serving ratio will jump higher. In fact, debt to service ratio hovered around 80-85% in 2021 while it stood at 99% in the first quarter of 2020. Analysts project that debt to service will go higher in the present circumstances.
Some economists explain that a country’s debt is sustainable if it is able to finance its debt obligations without external help or going into default.
‘’There is no single accepted measure of debt sustainability but the two most common metrics are the Debt-GDP ratio – which compares the size of a country’s debt to its economy – and Debt Servicing-Government Revenue ratio – which compares how much a country pays in debt financing with how much it earns in a given period.’’, they maintain.
The fear of many discerning Nigerians has been that the country’s debt may be headed to about N40trn if conscious efforts continue to be ignored to apply adequate strategies to reverse this trend.
But many experts have faulted this line of argument of the government on debt ratio to DGP instead of using debt ratio to revenue. Already analysts believe that the nation is being plunged into another round of deeper indebtedness given that debt to revenue which now stands at about 60 per cent.
‘’When debt approaches a critical level, investors usually start demanding a higher interest rate. They want more return for the greater risk.’’ He also said.
‘’Now, public debt is on the rise again, driven by aggressive borrowing by the present administration and currency devaluation that increased the size of foreign debt. Many international bodies such as the World Bank have raised concern over the speed and scale of Nigeria’s borrowing, often highlighting its weak Debt Servicing Ratio’’, an analyst who pleaded anonymity said.
These have heightened economic challenges with inflation still high at above 15%, unemployment is chasing 40%, underemployment at above 25%. These days almost everybody is aware that Nigeria is the poverty capital of the world recently over taking India with over 100 million people. The Naira which sold at N220/$ in June 15, 2015 has depreciated by about 100 per cent to N565/$ this January 2022.Nigeria’s reserves is dwindling while our total debt stock which is about N40trillion and still rising. Unfortunately, Nigeria spends over 90% of her revenue to service loans. The above statistics is discomforting many have said.
Accordingly, IMF projections are that the Federal Government could spend as much as 92.6 per cent of its revenue on debt servicing this year. This is contained in its 2021 Article IV, which was released recently.
IMF’s statement said the debt-servicing-to-consolidated revenue (total revenues of the government and its agencies) for 2021 and 2022 at 29 and 32.8 per cent respectively adding the it expects the public debt to grow by 117.8 per cent on a year-on-year basis in 2022, just as inflation is to grow at an average rate of 14.3 per cent. Headline inflation rate closed last year at 15.63 per cent.
Instructive is the out bust of Johnson Chukwu’ CEO of Cowry Assets Management limited that it would be very difficult for FG to raise its projected revenue of N10trn in 2022.
“As at November 2021, the minister of finance said federal government revenue was N5.5trillion and that was 11 months. If you consider that on monthly basis, it means we generate N500billion every month. If you use that at the end of 2021, the federal government generated N6trillion as revenue.
“The budgeted expenditure last year was N14trillion. What that means is that we have an effective budget deficit of N8trillion last year. This year, we have budgeted to generate N10.1 trillion and we have budgeted expenditure of N17.1 trillion and budgeted N6.99trillion as deficit.
The government said we going to add about N2.55trillion to sustain the payment of subsidy in 2022 alone.
“If you added that N2.55trillion to N17.1 trillion we are going to have N19.6trillion but the government said they will generate N10trillion. If they achieve their budgeted revenue expectation, we are going to have N9.6trillion deficit. Nothing has changed in the economy structurally as to enable us to generate from N6trillion to N10trillion.
“If we give it a benefit of doubt and increased government revenue to N7trillion and you spent N19.7trillion. Go and note it that Johnson Chukwu said it that we are going to end 2022 with N12.6tillion deficit.
“So, what follows next is that we will have to borrow. The Monetary Policy Rate is 11.5 per cent and so they are giving 13.5 per cent to Central Bank of Nigeria (CBN) to be borrowing.”
Already, Agusto & Co, a foremost credit rating agency in Nigeria, has projected that the country’s debt-to-revenue ratio will cross 80 per cent mark in 2022 following the build up to the general election in 2023.
In a new report Nigeria’s economic recovery – Defining the path for economic growth’, Economists at PwC Nigeria believe the economy is on track for a broad-based recovery. The report noted that asides the improvement in real GDP following the exit from recession in Q2 of 2017, the performance across several other macro-indicators suggest that the economy has turned a corner. Some of these indicators include: headline inflation at a 16 month low at 15.9%y/y in September, maintenance of trade surplus for 3 consecutive quarters, Purchasing Managers Index (PMI) remaining above the 50 points threshold for 6 consecutive months and the foreign reserves up to a 34-month high.
In his view, Managing Director/CEO of Financial Derivatives Company Ltd said
the outcomes would be “CBN will deplete reserves; MPC will raise interest rates; CRR will be lowered so banks can lend more, we’ll go back to orthodox lender of last resort; OMO will be used for liquidity management, not more than 180-day maturity and there will be a single yield curve.”
In addition to this, he explained that we should expect GDP to be 3.9% higher than population rate. Also, inflation would increase before reducing, external reserves will reduce and exchange rate differential will drop and begin to converge, hence, the Naira will strengthen.
Former Emir of Kano who was CBN Gov.,Sanusi Lamido Sanusi said, “To be honest, we are living on extra time. In 2015, we were in a deep hole. In 2023, we will be in an even much deeper hole than in 2015.
“Those struggling to be President, I hope they understand that the problems that they are going to face are multiples of the problems that were faced in 2015. All of us have to be ready for difficult decisions and if they are taken, we are all going to pay for them.
Is Nigeria “Bankrupt.”
The Nigerian economic crisis keeps increasing by the day. Its revenue keeps depleting as it continues to borrow to fund its obligations. Analysts are no longer able to pin down how much budget deficit to expect in 2022. FG already has accommodated a budget deficit of over N6trn in the N17trn budget for 2022. But having shelved its intension to remove fuel subsidy which will require about N3trillion, the government is facing danger ahead.
Gloomy Outlook
With the economy still wobbling, Nigeria still depends very much on oil revenue to survive. Whereas the price of crude is high now, Nigeria has failed to enjoy its full benefit given the highly reduced volume of production which hovers between 1.2m bpd and 1.3bpd as instead of 2.3mbpd. The country still needs to borrow huge funds despite the total debt stock of N40trn burdening it.