Moody’s Investors Service, a global credit rating agency, has revealed why Nigeria’s economy is somewhat trapped in a low growth path.
The rating agency alarmed that even though there was a 1.1 per cent increase in growth in 2018 that recorded 1.9 per cent against the 0.8 per cent recorded in 2017. “This growth level remains insufficient to markedly improve Nigerian living standards,” The Vice President-Senior Credit Officer, Sovereign, Aurelien Mali said.
Mali explained that government revenue weakness remained a key credit challenge.
He said: “The stable outlook is predicated on the low likelihood of a shock that will further impair Nigeria’s economic and fiscal strength.”
During the presentation at Moody’s Nigeria Annual Summit in Lagos, Mali pointed out that the current policy mix would lead to the same subdued real growth, with limited room to manoeuvre.
“The very weak institutional strength is rooted in core deficiencies: a history of opaque economic policymaking, a high incidence of corruption, and long delays in executing critical structural reforms. Macroeconomic policymaking has improved, but consolidated budgeting and public financial management – at federal, state, and municipality levels – remain opaque and slow.”
Moody also stated that “While the government’s external debt burden remains relatively low, the moderate score reflects the country’s high-interest payments to revenue ratio, which has averaged 25 per cent over the last three years, well above the B2 median of 11.4 per cent.
“In addition, Nigeria’s fiscal buffers are relatively small: its Excess Crude Account is almost depleted and its sovereign wealth fund stands at around $2bn (equivalent to 0.5 per cent of GDP). We expect general government debt to hover around 25 per cent of GDP in the coming years.
“Debt is mostly denominated in local currency and is refinanced largely by the local capital market, with liquid banks and pension funds exhibiting continued willingness to buy more government instruments.
“The government is increasingly shifting towards external borrowing sources to lower its interest burden, taking advantage of strong appetite from international investors. The debt management strategy will only show results slowly.
“Consequently, the country’s debt affordability metrics have also been aggravated by a rising interest burden, with Nigeria’s key interest-to-revenue ratio surging to 22.9 per cent in 2018 from 11.1 per cent in 2014.
“Interest payments have consumed on average close to 25 per cent of general government revenue since 2016. This increase challenges the government’s fiscal consolidation efforts and limits its ability to increase capital expenditures to improve infrastructure and boost the economy’s potential.”
GDP ratio reached eight per cent in 2018 and “has for years been at the weakest level among all the sovereigns that we rate,” Moody said.