March 31, 2023

NACCIMA, others list risks to economy as debt hits N46.3trn

Nigerian debt

President Muhammadu Buhari

*Debt service falls 8.2% to N3.87 trillion

*Debt stock within acceptable limits—DMO

*Not too good for a developing economy — NACCIMA

*Rising debt  undermines economic growth—Analysts

By Babajide Komolafe, Economy Editor, Emma Ujah, Peter Egwuatu, Yinka Kolawole & Nkiru Nnorom

LAGOS — The Debt Management Office, DMO, yesterday said the nation’s public debt rose by N6.69 trillion or 22.47 per cent to N46. 25 trillion ($103.11 billion) at the end of  2022 from N39. 56 trillion ($95.77 billion) at the end of December 2021, with the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture, NACCIMA, highlighting its risk to the economy.

But the amount spent on debt service fell in 2022 to N3.87 trillion, representing an 8.3 per cent decline from N4.22 trillion spent in 2021.

The DMO disclosed this yesterday, saying the public debt figure accounts for the total debt owed by the federal and state governments, as well as, the Federal Capital Territory.

The DMO said that the debt figure under review is 23.20% of the Gross Domestic Product (GDP), indicating that it was well within the limits set by both the Federal Government and international organisations.

It said: “The ratio of 23.20% is within the 40% limit self-imposed by Nigeria, the 55% limit recommended by the World Bank/International Monetary Fund, and, the 70% limit recommended by the Economic Community of West African States.”

Details of the data showed that the total Domestic Debt Stock was N27.55 trillion ($ 61.42 billion) while Total External Debt Stock was N18.70 trillion ($ 41.69 billion).

The DMO explained that the increase in the debt stock was due mainly to new borrowings by the federal and state governments to finance their budget deficits and to execute some specific projects, as well as, the issuance of Promissory Notes to settle some Federal Government liabilities.

It said: “Amongst the reasons for the increase in the Total Public Debt Stock were New Borrowings by the FGN and sub-national governments, primarily to fund budget deficits and execute projects. The issuance of Promissory Notes by the FGN to settle some liabilities also contributed to the growth in the Debt Stock.”

The DMO expressed optimism that ongoing efforts by the government to increase revenues from oil and non-oil sources through initiatives such as the Finance Acts and the Strategic Revenue Mobilization initiative will yield expected outcomes of higher revenue that will support debt sustainability.

The Federal Government’s Domestic Debt as of December 31, 2022, stood at N 22.210 trillion, held in various instruments.

Detailed analysis showed that N16.421 trillion (73.97 per cent) was held in Federal Government of Nigeria (FGN) Bonds; Nigerian Treasury Bills, N4.422 trillion (19.91 per cent); FGN Sukuk N742.557 billion (3.34 per cent); Promissory Notes, N530.033 billion (2.39 per cent); Nigerian Treasury Bonds, N50.988 billion (0.23 per cent); FGN Savings Bond, N27.505 billion   (0.12 per cent); and Green Bond, N15 billion, (0.07 per cent).

Debt service falls to N3.87 trn

Total debt service stood at N3.87 trillion in 2022 representing an 8.3 per cent decline from N4.22 trillion spent in 2021.

Vanguard analysis of the quarterly report of the Debt Management Office, DMO,   on domestic and external debt service payments in   2022 showed that N2.56 trillion was spent on domestic debt service while external debt service payment stood at $2.14 billion.

The external debt service payment of $2.41 billion at the current official exchange rate of N461.24 per dollar translates to N1.31 billion.

According to the DMO, total debt service payment in the first quarter of Q1’22 stood at N989 billion comprising domestic debt service payment of N66.9 billion and external debt service payment of N320 billion or $694 million.

Total debt service payment fell by 4.9 per cent quarter on quarter, QoQ, to N941 billion in Q2’22 comprising domestic debt service payment of N665 billion and external debt service payment of N275.95 million or $597.95 million.

However, total debt service payment rose by 41.1 per cent QoQ to N1.33 trillion in Q3’22 comprising domestic debt payment of N820.6 billion and external debt payment of $513.8 million or $801.23 billion.

In Q4’22, total debt payment service fell by 54.4 QoQ to N606.97 billion comprising domestic debt payment of N406.77 billion and external debt service debt payment of N200 billion or $312.27 million. 

Not too good for a developing economy — NACCIMA

Reacting, the Director General, of the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA), Mr Sola Obadimu, stated: “A rising public debt profile is not too good for a developing economy by any means, particularly if one cannot easily point to any developmental effects arising from the growing debt profile.”Yes, some people may argue that our public debt exposure level or ratio is still low at 23% of our GDP however, a situation where our national budget is gradually being wiped out by the duo of increasing levels of debt servicing and fuel subsidy should be a huge matter of concern based on its likely negative effect on development.” There’s a huge need for a higher level of fiscal discipline as well as a need to get value for money spent.

 Some of the indirect effects may be rising inflation rates and lower quality of life of the citizenry on an average level and, if not checked, it could get calamitous if we end up with a debt crisis later. This is a situation where creditors are not motivated to lend us more and/or we are unable to service our current debts as scheduled.”In summary, we need to exercise more fiscal discipline and be more accountable by getting good value for money spent for a start. Accountability is key.”

Rising debt  undermines economic growth—Analysts

Also commenting, Tunde Abioye, Head of Equity Research, FBNQuest Capital, said: “All things equal, a rising debt profile raises the country’s debt service costs, and as such, results in revenue inadequacy for key sectors of the economy.

“A related point linked to the first is that it effectively undermines economic growth since less resources are available to the FG to drive fiscal policy.

“Furthermore, it makes the economy less resilient to shocks. An economy with a heavy debt burden has limited room to manoeuvre during economic downturns.

“Finally, rising debt service costs and inadequate revenue may lead to more borrowing, which would raise public debt even more.”

Similarly, Alex Ibhade of DLM Advisory, said: “ With a large portion of its revenue spent on debt servicing, there is little money left to fund critical infrastructure, putting a dampener on growth and development.

“The cost of servicing the debt, in our opinion, may rise beyond the economy’s ability to cope, threatening the country’s ability to meet its fiscal and monetary policy objectives.”

In the same vein, David Adonri, Vice Chairman, of Highcap Securities, said that Nigeria’s macroeconomic condition might be precarious given the present state of the public debt stock. 

Lamenting the sorry state of the nation’s debt situation, Adonri queried: “I guess the figure of N46.3 trillion public debt stock does not include the N22 trillion Ways & Means advances from CBN. Nigeria has sunk deeper into the debt trap. Hope we are not on the verge of experiencing the Ghanaian situation. If this debt level is combined with the new debt for this year to finance the budget deficit, Nigeria’s macroeconomic condition may be precarious this year and beyond.”

We have to cut budget deficits —Ekechukwu

“It is no longer news to inform Nigerians that we have a debt profile that is going to make life unbearable this year, 2023. With a debt of N46.25 trillion as of 2022 year-end and a debt-to-GDP ratio of 23.2%, Nigeria’s credit rating continues to dwindle among major international rating agencies.

“This increase in debt can be attributed to the huge budget deficit that needed to be funded. Expenditure figures continue to grow without a corresponding increase in revenue.

“We need as a country, a budget that is near commensurate with our income profile. That way, borrowing will reduce, and should reduce.

“Cost of governance needs to be reduced drastically like in developed economies.

We need to end insecurity, so we can channel funds to some other sectors of the economy.

“We need to optimize our tax collections to ensure institutions and individuals pay taxes that match their revenues, and finally, all the revenue-generating ministries and parastatals must be held accountable for the last Naira generated.”

Govt must increase revenue —Fidelity Securities

Reacting, the Head of Research and Investment at Fidelity Securities Limited,   Victor Chiazor said: ” The country’s debt profile has become a cause for worry, not because debt in itself is bad but because we are using almost all of the country’s revenue to service our debt. At a debt service to revenue ratio of around 80%, it has become necessary for the government to just raise revenues. 

“Until government revenues improve nothing will change and we would be forced to borrow more to meet more of the recurrent expenditures as against capital projects. The country must find ways to increase both its domestic earnings and its forex   earnings if it hopes to drastically reduce its debt service ratio and build a sustainable economy.”

Private sector led- economy is the solution-Wyoming Capital boss

 Commenting on the rising debt profile, Tajudeen Olayinka, Managing Director/CEO, of Wyoming Capital and Partners said:” Debt profile of a country is a function of the government’s economic focus and structure of the economy, vis-a-vis other macroeconomic factors.

 A government with a public sector domineering focus would accumulate more public debts to fund projects in the economy, whereas a government with an emphasis on private sector dominance would require less public debts and more private capital to fund projects and drive capital formation in the economy. 

“The only way forward is to place the economy on a normal course of adjustment, with the private sector in the driver’s seat. That way, you encourage total-factor productivity, job creation and faster economic growth. This should be the focus of the administration of President-Elect, Asiwaju Bola Ahmed Tinubu. The economy is in dire need of drip and blood infusion.”

Nigeria will pay more to borrow—ARM Securities

Also commenting, Rotimi Olubi, Managing Director, ARM Securities, said that investors may now price Nigerian-issued debt instruments at a higher yield, leading to higher borrowing costs given the debt level.

He said: “Comparing the underperformance of revenue with the mounting debt service amount has continued to raise concerns about the sustainability of the country’s debt position. This implies that investors might price Nigerian-issued debts instruments at a higher yield, leading to higher borrowing costs. Furthermore, another downgrade of Nigeria’s credit rating would mean Nigeria’s treasury instruments would be judged to be of poor quality, thereby limiting potential Foreign Portfolio Inflow ( FPIs). 

“It is pertinent to find sustainable ways to free up unproductive expenses of the government, particularly petroleum subsidy. This is a major leakage that has continued to affect the federal government in several ways. The rising debt stock could prove to be even more incentive for the FGN to stick to its plans to remove petroleum subsidy by the end of May 29th 2023, potentially triggering an exacerbation in core and food inflation.”