By JULIUS ALAGBE
The mathematic of the nation’s economic position is becoming worrisome as many believe the nation is moving into debt overhang. The rate at which government is borrowing has outpaced the rate at which earnings are growing which is forcing it into more debt as debt service continues to mount. The nation’s debt hot N25.7 trillion at the end of the first half, having added N1.32 trillion in just six months.
The Minister of Finance, Zainab Ahmad, has always stated that the nation’s debt profile is in line with Fiscal Responsibility Act, trending below 20% debt to GDP ratio compare to other emerging economies average position.
While the borrowing spree continues, unfortunately, the funds are coming at steep cost. At the Eurobond market, Nigeria is paying above 6.5%, some basis point above other countries with similar risk profile
Federal Government has been the receiver of significant chunk of invested funds from the fixed income market, pension funds and other avenues. This high interest rate environment which deposits money banks are leveraging on to push earnings sizes.
Banks have generally shaved off interest in private sector credit to take position in the fixed income market with average yield at around 13.6% to 14%. The outlook for credit growth is however positive on the back of newly introduced 65% loans to deposits ratio. But analysts said that this may come at the expense of lower non-performing loans which rest at 9.3% in the first half.
Meanwhile, the fiscal side has not been performing over the years despite its expansionary focus. Government revenues have been underperforming estimates, cutting budget figure at the bottom.
At the moment at $84.3billion total debt portfolio, Nigeria’s gross external reserves which recently locked at $41 billion is less than half of the nation’s indebtedness when converted at the CBN rate.
The increased public debt, according to analysts, automatically raised debt service cost in the fiscal spending plan for 2020. Recent data from the Debt Management Office shows that the economy is in debit side to the tune of N25.7 trillion which came from both domestic and external sources.
Public debt portfolio has been on ascendancy in the recent time as budget deficits increase, which analysts consider as a result of dwindling revenues accrued to the government. At the end of year 2018, Nigeria’s total debt stock stood at N24.38 trillion, thus implies an increase in debt stock of N1.32 trillion in six months.
The DMO said that the current total debt stock comprised both the Federal Government debt, that of the 36 states and the Federal Capital Territory (FCT). For the Federal Government, the DMO said it owed N20.42 trillion, while the states and FCT owed N5.27 trillion.
Of the Federal Government debt, N7.01 trillion was categorised as external debt, while N13.412 trillion was categorised as domestic debt. For the states and the FCT, N1.309 trillion was owed externally, while N3.966 trillion was owed domestically, the DMO said.
Nigeria’s external reserves increased above $45 billion after the second half, albeit from stronger position towards the end of first half. The improvement recorded was on the back of increased earnings from oil receipt due to stable global price of oil and production volume.
However, the apex bank used significant chunk of the reserve as a buffer for defending the local currency, naira. Experts think that Nigeria is moving gradually to joining highly indebted nations in the emerging market. It was reported that the Central Bank of Nigeria, CBN, has spent a total of $34 billion in defending the naira.
Analysts at WSTC Securities said over the last two to three years, total government revenue had always fallen short of budgeted revenue by about 46%. They said if past trends were anything to go by, we might see a budget deficit of about N4.75 trillion which would be about N2.57 trillion higher than the estimated N2.18 trillion budget deficits.
The Institute of International Finance said that Nigeria recently relied on “hot money” flows to keep its balance of payments stable, with the central bank increasingly borrowing at short maturities and high yields to finance government deficits. The institute then stated that it expects such inflows to continue over the course of second half of financial year 2019.
According to the Institute, oil production capacity has remained subdued, with current volumes struggling to reach 2 million barrels per day, mbpd, which represents a 10% decline compared to 2013 and 20% decline from its peak in 2010.
The Institute noted that together with relatively low oil prices, this has limited Nigeria’s main source of external funding and fiscal revenue. Meanwhile, the Institute position that such external financing is needed to fund fiscal deficits, which cannot be absorbed by the domestic banking sector.
It observed that in the past, non-resident inflows consisted primarily of long-term loans but is now dominated by short-term portfolio debt. A substantial share of short-term portfolio flows comes from non-residents participating in central bank auctions of CBN bills.
Auction proceeds are then used by the central bank to finance government deficits through the buying up of treasury securities. The deficit, in parallel, has been financed through the issuance of Eurobonds. In the recent 2020 budget proposal, significant chunk of the fiscal spending is allocated to debt service. The debt would be serviced in 2020 with N2.45 trillion, which is about 30% of the budget size.
However, the budget is expected to be financed with borrow funds, as government projected a total sum of N2.2 trillion. It was announced last week that the country was getting a $3.5 billion loan from the World Bank.
Afrinvest said debt service to revenues would be elevated at 53.3% compared with the budgeted 29.9%. In addition to borrowing to cover the shortfall in revenues, we expect increased financing of FG’s operations by the CBN.
Nigeria has been paying a relatively high cost on its Eurobond financing, with current yields above 6.5%, Institute of International Finance noted. This has substantially increased interest payments, thereby weighing more heavily on the current account, which has turned to a deficit in recent quarters due to rising imports.
At the same time, legacy Eurobond debt will begin to mature over the medium term, exacerbating the government’s financing needs and pressures on the exchange rate. The battle to save the soul of the Nigeria’s economy went off track as gross domestic products sliced more than $170 billion in four years.
The nation’s key risk, generally speaking is government’s failure to undertake structural reforms. The government redistributionist policies are not working as informed third party see colour social interventionist moves.
With national debt ramping up, cutting budget deficit is not a priority, and experts wonder how the burgeoning exposure is expected to be settled. Is Mr. Buhari planning to pay off the money he is borrowing in his second term? At the moment, the Nigeria’s economy is undergoing severe growth drought.
In 1999 when the country returned to democracy, economy expanded from 0.5% to $57.4 billion. Stakeholders’ expectations for economic resurgence heightened when by fiscal year 2000 the nation experienced 5.5% growth trajectory.
The political economic characteristic of the day was pro-market in nature, and by 2001 the economy was on the way up.Then, the GDP increased 6.7% but growth doubled up 14.6% in 2002 as balance sheet size of the nation clicked $93.98 billion.
On a stable growth trend, by 2007, Nigeria was already blessed with GDP size of $262.215 billion. However, from 2007 to 2014, GDP expanded to $568.5 billion, which means an absolute increase of $300 billion, was added as growth rate range between 4.3 to11.3 percent. In-between, Nigeria had two Presidents – Umar Yar’adua and Goodluck Jonathan. The economic thrived strongly on steep Brent price in the global market.
Failure to save enough, diversified revenues sources and lack of sustainable economic policies by institutional control reeled big blow on government finance when oil price receded. Since 2015, data shows GDP, growth rate is reversing.