Nigeria’s rising debt stock alarming at N32.92trn

By Charles Abuede

• Analysts see a modest burden on debt servicing

As of December 31st, 2020, the Nigerian states and federal debt stock reflected that the country’s total public debt portfolio stood at N32.92 trillion, out of which N12.71 trillion or 38.60 per cent of the debt was external while N20.21 trillion accounting for 61.40 per cent was domestic. Recent data from the National Bureau of Statistics (NBS), revealed.

Further breakdown of foreign debt worth $33.35 billion in Nigeria’s file showed that $17.93 billion of the total debt was multilateral; $4.06 billion was bilateral from the AFD, China’s Exim Bank, the JICA, India, and KFW, while $11.17 billion was commercial (Eurobonds and Diaspora bonds) and $0.19 billion as Promissory notes.

However, in a statement by the debt management office (DMO) and as published on Business AM, the level of borrowing by the federal government has been on the decline as is shown in the Annual Appropriation Acts. The decline, it revealed, was part of the government’s measures to moderate the growth rate in the public debt stock as a way of ensuring debt sustainability.

Thus, there are steady decline in the new borrowings by the federal government to part-finance the deficits in the budget since 2017 when it was N2.36 trillion to N2.01 trillion in 2018; N1.61 trillion in 2019 and in the first appropriation Act of 2020, FG borrowed N1.59 trillion.

The COVID-19 virus has exacted a heavy fiscal toll, a combination of squeezed revenue collection and additional spending to soften its impact. Total debt service, domestic and external, consumed 95 per cent of the FGN’s total inflows in the first six months of the year 2020 according to the fullest definition of the Budget Office.

It includes payments on the FGN’s ways and means advances from the central bank, which essentially are an overdraft. Budget Office data shows total debt service in the first half of 2020 at N1.57 trillion, consisting of N854 billion domestic, N252 billion external and N461 billion in interest payments on the advances. Though, the payments peak in the first and third quarters of 2020 when the issuance of FGN bonds has been concentrated.

Though, the DMO does not currently capture these advances in its series for the debt stock or debt service. They are likely to be securitised, at which point they would be integrated into the DMO’s data and the budget office’s fullest definition is compared with just 51 per cent in the full-year’s budget. But, analysts have continued to say that, the ratio in the budget was already high in terms of emerging markets (EM) peer comparisons and of the resources still available for capital spending.

Capturing the federal government’s domestic debt service which shows that total payments amplified by 39 percent year-on-year in the final quarter of 2020 to N352 billion. The rise for the full year was a more modest 11 per cent. Regardless, as a rough guide, the domestic debt stock grew by 12.3 percent in the 12 months to end-2020 and the background to this growth is the abrupt rise in the federal government’s borrowing requirement and hence the DMO’s issuance which is the predominant cover for the FGN’s funded deficit.

Meanwhile, in February the federal finance minister set an aggressive target of total revenue collection hitting 15 percent of GDP by 2023. The outturn was just 5.9 percent last year’s N9.0 trillion for gross federally collected revenue before distribution to the three tiers according to CBN’s fiscal data, and the attainment of the target would require at least another N15 trillion.

Regardless, FG’s 2021 budget has a total expenditure of N13.59 trillion including total debt service of N3.32 trillion, which would represent 42 percent of projected revenue and assumed not to include the interest payments on the advances.

FBNQuest Capital analysts also see a modest burden of the external debt service. Further breakdown and analysis of the data obtained from the NBS and DMO on the servicing of the foreign debt in Nigeria’s file, shows the total debt payments hit $244 million in the final three months of 2020, combining $101 million and $143 million due to market and non-market conditions which makes the servicing of the FGN’s external debt modest.

In the views of analysts from FBNQuest Capital Research, they asserted that: “The burden is modest because about two-thirds of the debt stock is due to concessional lenders. It really should not be onerous for an oil producer generating revenue from its current quota of 1.52 million barrels per day from the OPEC+ alliance and from condensates, which are not covered by quota.

“The alliance is due to meet at the close of Q1 to decide on quota distribution for May.  One argument against external borrowing, most of all from the market, is that naira depreciation adds to the budget cost of servicing this debt. Budget Office data show that this more than doubled from N181 billion in 2017 to N449 billion in 2019,” they said.

Taking a cue from their argument, a case can be made that interest rates were higher than stipulated for domestic borrowing. This was the case that was so glaring in November and December 2020. However, there is now a 350 basis points differential in favour of external borrowing by the FGN for the longest maturities. However, investor appetite for sovereign Eurobonds in the EM universe has again been demonstrated by the republic of Ghana’s latest offering.

“Based upon annual interest and fee payments in the 12 months through to December, and the stock of external debt as at end-June, we calculate the average borrowing cost from the World Bank Group at 1.2 per cent. Comparable figures for other creditors are 2.0 per cent for the African Development Bank (AfDB) Group and 2.6 per cent for Exim Bank of China.

“Such repayments do not start until 2023 for the FGN’s drawdown in April of Special Drawing Rights (SDR2.5bn or $3.5bn) under the IMF’s rapid financing instrument. It was happy to borrow from the Fund on this occasion because the loan came without conditions attached. The FGN was, however, required to make what we might term pledges of its policy intentions,” FBNQuest analysts opined.

Meanwhile, repayments of principal in the fourth quarter totalled $96 million including $53 million to the World Bank group while interest payments on market debt peaked in the second and fourth quarters reflecting the issuance calendar for Eurobonds with semi-annual coupons. This is the same trend as with the naira-denominated FGN bonds.