N38.01trn knee on our necks: Nigeria piles on debt in run up to lame duck Presidency year

By PHILLIP ISAKPA & CHARLES ABUEDE With poor CAPEX profile

Analysts raise concerns over Nigeria’s vulnerable low debt-to-GDP ratio, fiscal sustainability
W/Bank says Nigeria, EMDEs risked $324.7mn savings in 2021 from debt initiative

An official public debt pile-up by federal and state governments that has raced to N38.01 trillion at the last time of counting by the Debt Management Office is being described as a knee on the necks of Nigerians in the lead up to 2022, the undoubtedly lame duck year of the Muhammadu Buhari Presidency, when all attention is expected to be focused on the soapbox and politicians hold sway, jostling, scheming and manoeuvring towards the 2023 general elections. The debt pile-up is believed to be putting at least 170 million Nigerians in the infamous ‘I can’t breathe’ screaming position that late George Floyd, a black American, was put in when an alleged white racist police officer, Derek Chauvin, placed his knee on Floyd’s neck, making him unable to breathe, and which eventually led to his death. Chauvin was later convicted of murder in April, 2021, nearly a year after the incident. For Nigerians, the galloping public debt is stifling and asphyxiating them economically as they search in vain to see where the trillions borrowed in their names have gone to. The continuing growth of public debt, appears even more worrisome, say experts, because the President Buhari government is in a winding down mode and in 2022, with a myriad of challenges confronting the country, especially insecurity, serious revenue shortfall, and the likelihood of politics overshading all else, a president not contesting for re-election and condemned to finding himself a lame duck president, except there is a dramatic twist in the expected run of play, seem perturbed by goings on. One analyst said a clearly overwhelmed and tired President Buhari would next year be eagerly looking forward to going back to Daura, Katsina State, his home town and state, respectively, a place that has increasingly come under attacks by kidnappers, bandits and terrorists, leaving the next occupant of Aso Rock Villa to deal with the mountain of debts, a lot of which has been piled on by his government. But concerns over the debt overhang are not just about how much of a knee on the necks of Nigerians it has become. Cries have long been heard over the paucity of revenue sources to finance the deficit built into the fiscal 2022 budget, the last full budget that the Buhari Presidency would run; and Nigeria’s inability to diversify its revenue base, coupled with the frail economic recovery due to the pandemic, which have long raised concerns over the fiscal sustainability of the country, even as her public debt levels continue to widen amidst the existence of what analysts have termed a moderate risk to debt distress. Economic experts conversant with the situation assert that Nigeria has continued to grapple with poor revenue generation while facing a lack of will to manage its expenditures efficiently. For instance, they note that for a country in dire straits, there are no significant cuts made to its overheads, while its statutory spending is still on the rise. Even more so, a serious source of concern for many analysts remains the growing debt stock, which has no significant capital expenditure profile to show for it. Economic analysts at CSL Research opined that the widening debt profile of the federal government, while the economy remains vulnerable to external shocks, is now raising concerns over Nigeria’s fiscal sustainability, even though the low debt to GDP ratio gives some comfort and should not induce panic. “While we note that the widening debt profile amidst vulnerability of the economy to external shocks; government's inability to effectively diversify its revenue base; and the frail economic recovery, could perhaps raise concerns over fiscal sustainability. The relatively low debt to GDP ratio of 35 percent, which remains significantly below the sub-Saharan Africa level of 58 percent and below the 40 percent limit set by the Debt Management Office, gives some comfort. “We also see a moderate risk of debt distress, mainly due to the moderate stock of foreign currency-denominated debt (albeit rising fast), which masks the impact of exchange rate shock. That said, the government's interest payments continue to absorb a large share of federal government revenues, making the otherwise low debt-to-GDP ratio highly vulnerable to shocks. The total debt service to revenue ratio was estimated at 73 percent in October,” they noted. In a note seen by Business A.M., analysts at FBNQuest Capital Research, offering an opinion on the debt situation, stated thus: “Nigerian public debt continues to grow at a rapid rate, prompting talk of an overhang. If we look solely at the debt-to-GDP ratio, Nigeria is in a much better position than its Emerging Market peers. The external balance sheet is in decent shape, which explains why the FGN carried off a successful sale of Eurobonds, raising $4 billion rather than the $3 billion on offer. “When we turn to debt service in the context of revenue generation, then the picture becomes worse than its peers. The revenue collected from the non-oil economy is rising but from a very low base. The tax revenue-to-GDP ratio is the worst in Africa, according to the World Bank. There are ways to transform collection, yet the gains can only be achieved realistically over the medium term,” they concluded. Although concerns over Nigeria’s public debt position has always been loud at times, and muted sometimes, attention was again turned to it when last Wednesday, the Debt Management Office (DMO) disclosed that Nigeria’s total public debt increased by N2.54 trillion to N38.01 trillion at the end of September 2021. It was a rise from N35.46 trillion at the end of the first half of 2021. The DMO noted that the debt comprises total external debt, 40.98 percent of the whole; and domestic debts accounting for 59.02 percent of the federal government and the 36 states' debts. The DMO said the increase was largely accounted for by the $4 billion Eurobond issued by the federal government in September 2021. “The increase of N2.540 trillion when compared to the corresponding figure of N35.465 trillion at the end of Q2 2021 was largely accounted for by the $4 billion Eurobonds issued by the Government in September 2021. “The issuance of the $4 billion Eurobonds has brought significant benefits to the economy by increasing the level of Nigeria’s External Reserves, thereby supporting the Naira Exchange Rate and providing the necessary capital to enable the Federal Government finance various projects in the Budget. The triple tranche $4 billion Eurobond, issued in September 2021, was for the implementation of the New External Borrowing of $6.18 billion in the 2021 Appropriation Act,” the statement by the DMO read. But just before the release of the figures by the DMO, a day before, as if perfecting the craft of widening public debt stock and debt service payment, the House of Representatives approved another round of external borrowings for the federal government to bring the total to $5.8 billion, inclusive of a grant of $10 million, as part of the proposed 2018-2020 external borrowing plans. One quick fact that seems to be emerging and which needs to be established here is that Nigeria will be relentless in its borrowing plans in the medium term, while it continues to gun for more revenue sources to finance its budget deficit, meet its annual capital expenditures, as well as service the already expanding debt stock. In a period of nine months in 2021, Nigeria spent N2.49 trillion on debt servicing payments. A quarterly breakdown shows that N1.02 trillion, N445.53 billion and another N1.02 trillion were pumped into the servicing of debts. Comments by the International Monetary Fund (IMF) on the current debt levels of some emerging markets and developing economies, in its latest report on global debt, points to concerns around sustainability. “The concerns of debt sustainability are likely to get intensified as the cost of borrowing (interest rates) rises, especially in countries with higher debt vulnerabilities. The risk thereof will be magnified if global interest rates rise faster than expected as significant tightening of financial conditions would heighten the pressure on the most highly indebted governments, households, and firms as the prospect for growth will suffer if the public and private sectors are forced to simultaneously deleverage,” the IMF stated. However, it can be recalled that the Debt Management Office as of last year, increased the ceiling for public debt from 25 percent to 40 percent of GDP. The measure shields the external and domestic debt of the federal and state governments. The outturn, however, at the end of 2020 was 21.6 percent. On the basis of 2020 GDP, the new ceiling allows additional borrowing of N23 trillion. Meanwhile, some economic analysts have further asserted that the higher ceiling should comfortably provide accommodations for both the federal government’s ways and means advances from the Central Bank of Nigeria (CBN) and the issuance of Asset Management Corporation of Nigeria (AMCON) bonds. The advances, which are the FGN’s unauthorised overdraft, were estimated last year at N10 trillion and will be added to public debt once they have been securitised, for which the go-ahead of the National Assembly is required. In their thinking, which is in line with the position of FBNQuest analysts, “The AMCON bonds, which were initially issued by the DMO, but which in their latest form are issued by the CBN, should be included in public debt. The thinking is said to centre around the servicing of the bonds, given the ’shortfall’ in the annual levy on the banks. The new ceiling can also cover issuance within the existing securitization programme for arrears accumulated under the previous administration. At the outset, the programme was estimated at N2.70 trillion, and issuance to date is roughly N1.0 trillion, including some dollar-denominated pro-notes. The programme has considerably slowed due to the thorough procedures for the verification of claims and the likelihood that some claims are being challenged.” But CSL analysts note that the federal government bonds had the largest part of debt servicing payments. Even with the increasing cost of debt servicing, the World Bank had, before this time, pointed out that Nigeria and some other countries refused to participate in a temporary suspension of debt-service payments due to concerns about future access to debt and credit-rating downgrades. To this end, the World Bank said that these countries, including Nigeria, could have saved about $324.7 million between January and December 2021 through the debt service suspension initiative.

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