…As debt service to revenue ratio hits 72% •Analysts, IMF paint picture of threat
By Emeka Anaeto, Business Editor and Nkiru Nnorom
The ability of the Federal Government (FG) to finance other critical sectors of the economy, especially investing in infrastructural development, will face more set-back over ballooning debt service-to-revenue ratio.
This comes at the backdrop of the plan to borrow $2.1 billion (about N800 billion) before end of this year in line with the Coronavirus (COVID-19) induced adjustments to the 2020 budget.
This is also added to the plan to borrow another N4.2 trillion in the 2021 fiscal year as contained in the Appropriation Bill the Federal Government, FG, tabled before the National Assembly last week.
Consequently, contrary to the initial FG’s projected Debt Service-to-Revenue Ratio, DSRR, of 47 per cent Financial Vanguard findings show that as at first half of the year, the country’s Debt Service-to-Revenue Ratio, DSRR, had risen to 72 per cent following a series of borrowings at the backdrop of the sharp drop in oil revenue amidst pressures to fund COVID-19 related economic measures.
DSRR is the proportion of the country’s revenue that goes into debt servicing obligations, also indicating what is left for the implementation of the government’s budget.
Consequently at 72 per cent the country would be left with only 27 percent of its revenue for the purpose of the budget implementation.
But with additional borrowings planned in the forth quarter of the year and in 2021, public finance analysts believe the revenue performance would still lag behind the rate of growth in debt and consequently, DSRR is projected to hover around 80 per cent by end 2020 and grow further in 2021.
Presently, Nigeria’s DSRR stands at 72 per cent, and even at FG’s 47 percent, is far beyond 22 percent prescribed by the World Bank.
But the World Bank believes that the country could borrow more if it ramps up its revenue capacity, a position fully backed by Nigeria’s Finance Ministry and the Debt Management Office, DMO, which believe the problem is revenue and not debt.
Breakdown shows that the country’s expenditure on debt servicing grew to N2.14 trillion in 2019 from N943 billion in 2015.
Though this year, the government had planned to spend N2.5 trillion on debt servicing, the escalated impact of COVID-19 may push the final figure to N4.0 trillion with 2021 estimate at about N5.0 trillion, contrary to the N3.1 trillion earlier earmarked.
The country’s debt profile had leapfrogged to N27.4 trillion at the end of 2019 from N12.61 trillion in 2015 and before rising further to N31.01 trillion at the end first half this year.
The figure is expected to rise to N32 trillion by end of the year while the budgeted 2021 borrowings would put the figure at about N36 trillion.
Raising the alarm over the worrisome state of affairs in the nation’s public debt profile, the Monetary Policy Committee, MPC, of the Central Bank of Nigeria, CBN, last week stated: “The Committee noted the rising public debt profile and urged the fiscal authority to strengthen its debt management strategy, explore other sources of revenue, as well as enhance efficiency in public expenditure.
“At present, fiscal policy is constrained and so cannot, on its own lift the economy out of contraction or recession given the paucity of funds arising from weak revenue base, current low crude oil prices, lack of fiscal buffers and high burden of debt services.”
In its review of the nation’s debt challenges, Afrinvest West Africa, a Lagos-based investment house had these to say: “The Q2:2020 debt data recently published by the Debt Management Office (DMO) revealed that Nigeria’s public debt stock grew 20.6% Year-on-Year (YoY) and 8.3% Quarter-on-Quarter (QoQ) to ¦ 31.0tn ($85.9bn). “This translates to a Debt-to-GDP ratio of 20.4% based on 2020 GDP estimate, from 19.0% as at year-end 2019.
“The strong increase in the public debt stock was driven by the devaluation of the official exchange rate from N306.00/$1.00 to N361.00/$1.00 as well as external and domestic borrowing used to plug the large fiscal deficit brought by the COVID-19 pandemic.
“FG’s Budget support loan of ¦ 1.2trn ($3.4bn) was accessed from IMF’s Rapid Financing Instrument (RFI) in April 2020, which in addition to currency devaluation resulted in a 36.5% YoY and 13.8% QoQ rise in external debt (FG & States) to ¦ 11.4trn ($31.4bn).
“Overall, FG’s external debt stock increased 18.9% YoY ($4.3bn) to $27.2bn while the local currency value increased 40.1% YoY to N9.8trn.
“Although the external debt of States remain unchanged at $4.3bn, the local currency value rose 17.5% YoY to N1.5trn. Similarly, FG’s domestic debt grew 15.2% YoY and 6.9% QoQ to ¦ 15.5trn as the DMO ramped up domestic borrowing to plug budget deficit given low yields in the fixed income market.
“In terms of debt servicing, total payments in Q2:2020 rose 42.6% on a YoY basis to ¦ 416.4bn, driven by both domestic and external debt.
“FG’s domestic debt servicing burden rose strongly by 45.6% YoY to ¦ 312.8bn from ¦ 214.8bn in the preceding year. Similarly, external debt servicing cost increased 13.8% YoY to $287.0m from $252.3m in Q2:2019, reflecting multilateral and bilateral debt service obligations.
“Given the devaluation of the official exchange rate, the increase in external debt service payments in local currency terms was stronger at 34.0% YoY to ¦ 103.6bn.
“The increase in debt servicing burden suggests that FG’s debt service to revenue ratio would continue to worsen, especially given weak revenue growth and further currency devaluation to N381.00/$1.00 in Q3:2020.
“We highlight that the ratio increased to 72.2% as at May 2020 from 59.6% as at year-end 2019. This is unsurprising as our concerns about the devaluation impact of the aggressive binge in external loans since 2017 have been justified.
READ ALSO: Nigeria’s total debt now N33trn —Senate
“We note that the share of external debt in total debt for the FG has now reached 38.9%, closer to the FG’s target of 40.0%.
“This should prevent the issuance of further external loans given the strong chance of further currency adjustments.
“Notwithstanding, we expect a sustained rise in the FG’s external debt stock given additional budget support of $2.1bn yet to be disbursed by the World Bank, AfDB and the Islamic Development Bank.
“Looking forward, we expect more domestic debt issuances to bring down the share of external debt and lower devaluation risk.
“With debt service to revenue at 72.2%, the FG’s fiscal position is under pressure. “This is a more prominent debt sustainability risk than Nigeria’s low debt to GDP ratio of around 20.4%, since revenue collection has been underwhelming and below peers at less than 10.0% of GDP.
“While we believe the subsequent adjustment to the official exchange rate to ¦ 380.0/$1.0 in August, removal of energy subsidies and the recovery in oil prices since Q2:2020 would have supported revenues in Q3:2020, we suspect that this would not be enough to significantly close the fiscal funding gap.”
Also commenting, Johnson Chukwu, Managing Director/CEO, Cowry Asset Management, another Lagos-based investment banking firm, stated: “As you can see, if the government spends 80 percent of its total revenue in managing debt, then what space do you have to even pay salaries and wages? So, that’s why the government has been borrowing massively both locally and internationally.
“Because the government has been borrowing to meet basic overhead and that leaves little room for infrastructural development. So, the government has to rethink its approach to building infrastructure.
“As it stands today, the government finances cannot support infrastructural development from budgetary allocations. The government must find alternative sources to build infrastructure and expand economic opportunities given the limitations it currently has, otherwise, we would keep building debt and it will get to a point debt service could actually consume 100 percent of our total revenue and that is clearly, a pointer to a default in debt repayment.
“We really can’t continue to borrow to given our debt service-to-revenue ratio today.”
Though he said the government has been increasing the drive to rev up its revenue through various taxes, but argued that the impact of Value Added Tax (VAT) on federal government’s revenue is minimal because the federal government’s share of VAT is low.
According to him, “Even with the increase in VAT, it will not materially change the budgetary deficit that the government is currently exposed to. The key thing is that when you tax the economy too much, you also kill enterprise and economic activities.
“So, there is just a limit to how the government will continue to increase taxes on the economy without having adverse effect of stifling economic activity.”
Nigeria Economic Summit Group, (NESG) the private sector-led economic think-tank, had recently said in a statement by its Board of Directors, that Nigeria’s debt service-to-revenue ratio is unsustainably high.
Asue Ighodalo, chairman of NESG Board said in the statement, “The importance of dealing with the challenge of inadequate revenue is highlighted by the very high debt service-to-revenue ratio.
“While this ratio has improved to 72 percent in May 2020 from 99 percent recorded at the end of March 2020, it remains unsustainably high and undermines the ability of government to meet non-debt obligations such as the provision of infrastructure, human capital development and protection for our nation’s large population of vulnerable people,” Ighodalo said.
IMF’s global picture
Last week also, the International Monetary Fund, IMF, painted a global picture of what is happening around the world on debt burdens.
It stated: “The COVID-19 pandemic has pushed debt levels to new heights. Compared to end-2019, average 2021 debt ratios are projected to rise by 20 percent of GDP in advanced economies, 10 percent of GDP in emerging market economies, and about 7 percent in low-income-countries.
“These increases come on top of debt levels that were already historically high. While many advanced economies still have the capacity to borrow, emerging markets and low-income countries face much tighter limits on their ability to carry additional debt.
“Indeed, about half of low-income countries and several emerging market economies were already in or at high risk of a debt crisis, and the further rise in debt is alarming.
“Just as they are starting to recover from the pandemic, many of these countries could suffer a second wave of economic distress, triggered by defaults, capital flight, and fiscal austerity.”