Danger ahead!: Experts warn macroeconomic instability looms for Nigeria

Nigeria’s debt service cost is putting severe pressures on the purse carrying its revenue, which continues to dwindle.This is happening at a time when many indices show an economy that is worse for wear, with external reserves below $40 billion, the Naira weakening daily against the United States dollar, both at the parallel and the investors’ and exporters’ segments of the FX market, an inability to benefit from a rally in crude oil price to above $100 per barrel, and the country’s daily oil production having dropped drastically.

With over $3 billion lost to oil theft alone in 2021, the country has been kept on a fiscal cliff.

Nigeria’s spending problem is now becoming the new song in the mouths of many, including Nigerians and analysts, as they see the looming and about to be triggered macroeconomic instability in Nigeria, “If the trend of continued rising debts costs without a corresponding revenue increase remains longer.

Economic experts at FSDH Capital Research note that the rising deficit, at a time when crude oil price is high, points to the existence of several fundamental and structural problems, including as oil theft, subsidy payment, and lack of adequate investment in the oil and gas segment, which the Nigerian government has failed to address for decades.

“By implication, Nigeria’s public debt will increase further in 2022. Already, government debt has risen by more than three folds since 2015 or by almost five folds when CBN Ways and Means and AMCON liabilities are included in total debt. As a share of GDP, public debt appears below the sustainability threshold of 40 percent. However, debt servicing cost as a share of revenue is high and stood at 76 percent as of November 2021,” they said in a note.

Pointing to the danger ahead, the experts assert thus: “This means that Nigeria could be trapped in a debt cycle, where it borrows to fund recurrent expenditure. For instance, from January to November 2021, aggregate capital expenditure was N3.4 trillion while total borrowing stood at N7 trillion, according to data from the Federal Ministry of Finance, Budget and National Planning. Rising debt costs, without a corresponding increase in revenue, could trigger macroeconomic instability if the trend continues.”

Rendering authority to a report produced by the Budget Office of the Federation, the federal government of Nigeria’s debt service to revenue, excluding ways and means, for the third quarter of 2021 amounted to 72 percent and puts interest payments on ways and means advances from the CBN at N916 billion.

However, by the rule of thumb, ‘ways and means’ financing from the CBN to cover the unfunded portion of the budget are not included in the public debt figures.

But if these interest payments are factored in, the ratio jumps to 97 percent.

Zainab Ahmed, the finance minister, during the 2022 budget presentation earlier this year put the debt-service to revenue (excluding ways and means) ratio for January to November 2021 at 76 per cent. Interestingly, neither the Q3 figures nor the 11 months numbers are encouraging. Overall, Nigeria’s domestic debt service accounts for about 70 percent of total debt service, but only about 60 percent of total debt stock. A major reason for its elevated weighting is based on the fact that 60 percent of the external debt stock is to multilateral and bilateral lenders on concessional terms.

But the Debt Management Office (DMO), in a circular published on its website, states that Nigeria’s total debt stock as of December 2021 was N39.55 trillion with the external debt amounting to N15.85 trillion, while the domestic debt printed at N23.7 trillion.

The debt office also said that the debt stock was likely to hit N45 trillion in 2022, as the government planned to borrow an additional N6.39 trillion to finance the 2022 budget deficit; but Patience Oniha, director-general, DMO, has said the borrowings by the Nigerian government to finance her deficits, as well as to fund critical infrastructure, are not necessarily bad.

“The issue of debt has become topical in Nigeria that sometimes it almost looks as if borrowing is an offence or a crime…The first thing we must understand is that countries across the world borrow, be it poor countries, advanced countries, developed countries, or emerging markets. They all borrow. We usually hear complaints that debt levels are rising in Nigeria. Globally, debt levels are rising, not just in Nigeria,” she said.

Regardless of the need to borrow for deficit funding, many experts say it is bewildering that as fiscal deficits widen, gross external debt keeps mounting. Shockingly, Nigeria, in the last five years, has been running a fiscal deficit to GDP in excess of the three percent threshold.

But just as the DMO has predicted the debt stock to hit N45 trillion by the close of the year, other analysts see the debt stock rise further to N50 trillion in the wake of the forthcoming general elections in 2023.

With the underperformance of government revenue over the years, analysts have noted that total public debt is expected to trend upward following a budget deficit of N6.4 trillion for 2022. This is hinged on the fact that Nigeria has failed to diversify its revenue sources away from crude oil to other non-oil revenue sources.

Going by experts’ projections, government revenue will underperform as a result of higher subsidy payments and limited oil production while expenditure (on recurrent items) will fall in line with budget estimates.

And away from the supposed revenue from crude oil for Nigeria’s debt service, and the foregoing mantra on rising debts, the latest data from the DMO on debt service domestically, indicates that there was a 12 percent year on year decrease to N310 billion in the last quarter of 2021 and the federal government of Nigeria’s debt services for Nigerian Treasury Bills (NTB) fell by 92 percent year on year to N6 billion, maintaining a downward trend for the fifth month in a row. However, in spite of the year on year decline in debt service payments, a major challenge is the FGN’s poor revenue collection credentials.

Consequently, as recently lamented on by Tony Elumelu, the Nigerian billionaire banker and multi-sector investor, Nigeria had over $3.5 billion of its revenue stolen by way of crude oil theft in 2021, representing a major setback to the government’s revenue hopes from crude oil. The revenue loss experienced by Nigeria from oil theft has forced the nation into more borrowings from the international community and financial institutions.

Nonetheless, the myriad of analysts further noted that as a possible remedy, there is a need for urgent and consolidated efforts by the federal and state governments to address the challenges of oil theft and pipeline vandalism, which are crucial in improving oil output and by extension, oil revenues.

For non-oil revenue, the harmonisation of government taxes, plugging leakages, ensuring transparency and accountability in the management of public funds and improving the business environment are necessary for the short to medium term.