Tougher times ahead as rising subsidy weakens FG, states’ revenue
President Muhammadu Buhari and Minister of Finance, Mrs Zainab Ahmed

Uche Chris

Worsening economic performance is threatening to force the country into a debt over-hang as the government continues to amass more loans, which have ballooned to a total of N35.47 trillion in the second quarter of the fiscal year 2021.

Meanwhile, Fitch rating agency may have dampen expected reception of the intended road show by the government for the Eurobond with a B rating; which though above average, is a reflection of the parlous state of the economy.

Last week President Buhari wrote to the National Assembly requesting another tranche of loans to the tune of $4.2 billion from multilateral agencies and $700 million of Eurobond.

The loans are meant for infrastructure development, according to government, but experts say funding gap now includes recurrent expenditure as dent service alone consumes 91 percent of the revenue.

Africa largest economy is earning far less than the government is spending, the gap which it has continued to bridge with both local and foreign loans amidst weak macroeconomic metrics.

Attempts to boost non-oil revenue has not produced a significant result as the Nigerian government still relies on receipts from crude oil for its spending plans.

In the light of fresh borrowings to finance capital projects and widening deficit budget, analysts projected that Nigeria’s total public borrowing could cross N50 trillion by the year-end following a plan to securitize the central bank overdraft to Federal Government estimated at about N14 trillion.

Debt Management Office (DMO) audit report for 2019 indicates that Nigeria’s public debts becomes moderate risk two years ago, from a low-risk sovereign rating due to revenue challenge.

As of March, total public debt stood at N33.1 trillion, but expanded to N35.47 billion at the end of the first half of 2021 as the government raised N2.36 trillion in 3-months.

In the first five months of the year, Budget Office hinted in a performance report that revenue underperformed by about 50%. Earlier in the year, Nigeria expanded more than 90% of revenue generated on debt service.

Though Nigeria’s total public debt remains below 55% set by the World Bank for its fiscal sustainability measure, debts as a percentage of government revenue have continued to worsen.

In 2019, the DMO report shows that total public debt as a percentage of national revenue crossed 211 per cent. By the end of 2020, it moved to 212.3% while DMO is expecting this to moderate to 211.4 per cent in 2021.

However, with more than $10 billion foreign currency loans in the pipeline, the debt to gross domestic ratio is expected to worsen in the mid-to long term while pressure would aggravate on debt to revenue services.

Total public debt service paid from Nigeria’s revenue printed at 25.2 per cent in the fiscal year 2019, according to DMO audited report for the year.

Nigeria’s total public debt sustainability conservatively expect this to worsen to 26.1 per cent for 2020, but the pandemic-induced pressure appears to have distorted the plan as Federal Government engages in a borrowing spree in the local market and through CBN overdraft.

Godwin Emefiele, the Governor of the Central Bank did not refute this in address but claim the apex bank is a lender of last resort.

But analysts said even before the pandemic, Nigeria has been accessing funds from the CBN back door due to its inability to meet its revenue target because of instability in the oil market.

“…the ratio of Public Debt to GDP remains below its benchmark under the Baseline scenario, but the revenue-related debt indicators were relatively high under the shock scenario, indicating incidence of revenue challenges.

“However, the ongoing efforts by the Government towards improving revenue generation and diversifying the economy to enhance exports, through various initiatives and reforms in the key sectors of the economy would enhance the revenue performance, and thus, improve the Export and Revenue-related indicators and Borrowing Space in the medium to long-term”, DMO noted.

It noted government initiative in the Oil and Gas, Agriculture and Solid Minerals sectors, Tax Administration and Collections, as well as the strategic revenue Growth Initiatives, and, with the recent signing into law of the Finance Act by President Muhammadu Buhari.

While noting that there is some space to borrow based on the country’s current revenue profile, DMO said the ratio of External Debt Service-to-Revenue trends towards the fiscal threshold and breached substantial space mark by 2021.

“With the concerted efforts by the Government to improve revenue through its various initiatives and reforms in the key sectors of the economy, the country’s Borrowing Space is expected to be enhanced considerably”, the agency added.

Nigeria made interest payments of $1.065 billion on external debt in 2019 amounted compared to $687.80 million in 2018, reflecting an increase of $377.27 million or 54.85 per cent, the DMO report shows.

The increase in borrowing costs was attributed to payments made on Multilateral and Bilateral debts, as well as the payment of interest on the Commercial debts.

Fitch Ratings has assigned Nigeria’s proposed bond, to be issued under its Global Medium Term Note Programme, a ‘B’ rating. Today, the Debt Management Office said Nigeria will hold global investors call on Friday ahead of its $3 billion Eurobond issuance.

According to Fitch, the ‘B’ rating is in line with Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) assigned on 19 March 2021with a stable outlook.

“Nigeria has an environment, social and governance (ESG) relevance score of ‘5’ for both political stability and rights and rule of law, institutional and regulatory quality and control of corruption, as is the case for all sovereigns.

These scores reflect the high weight that the World Bank governance indicators have in our proprietary sovereign rating model”, Fitch stated.

It added that the rating on the proposed bond is sensitive to any changes in the Long-Term Foreign-Currency IDR, which Fitch said is sensitive to public and external finance – individual or collectively.

On the sensitivity of the rating to public finances, Fitch stated that failure to address weaknesses in the fiscal policy framework, illustrated by a reinstatement of the fuel price subsidy or continued large central bank financing of the sovereign, particularly if it exceeds institutional safeguards.

Also noted is the nation’s external finances that Fitch said a significant intensification of external liquidity pressures, for example, illustrated by a rapid drawdown in reserves or renewed downturn in oil prices could trigger rating actions.

Meanwhile, it added that the same factors, individually or collectively, could lead to positive rating action/upgrade.

Fitch said stronger resilience of external finances from a durable recovery in international reserves or resumption of current account surpluses, and exchange-rate regime reform addressing Nigeria’s ongoing external vulnerability.

Also, it posited that a credible path to the stronger mobilisation of domestic non-oil revenues is sufficient to significantly lower the particularly high debt- and interest-to-revenue ratios.

How it added that a broad and sustainable improvement in the macroeconomic picture, with stronger economic growth supporting a recovery in the gross domestic product (GDP) per capita and a durable moderation in inflation towards the central bank’s target.

“Nigeria does not publish consolidated fiscal data on a general government basis, which complicates the assessment of fiscal performance”, Fitch said.


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