Nigeria’s 118.9% debt service/revenue ratio worst in the world, says EIU

By Onome Amuge.

Nigeria’s debt service-to-revenue ratio, which stood at a staggering 118.9 percent from January to April, has been ranked the worst in the world by the Economist Intelligence Unit (EIU), one of the world leaders in global business intelligence and industry reports.

The country’s undesirable debt service profile, according to EIU analysts in a global note to investors, underscores Nigeria’s unsustainable fiscal policy and the government’s stubborn resistance to changing policy.

On the back of this, the EIU said Nigeria’s deficit could now be expected to top 6 percent of its 2022 GDP.

“At N3.1trn, the government deficit in January-April was almost double its income and stemmed from a 50.9 percent shortfall in revenue relative to budget, despite an underspend of 18.3 percent,” EIU analysts said.

“The MTEF/FSP draft contains two scenarios for federal budget estimates for 2023. Under a scenario where petrol subsidies—estimated to cost N6.7trn for the whole of 2023—end mid-year as planned, total spending would be N18trn, which is 3.9 percent more than the 2022 budget. However, under a business-as-usual scenario without subsidy reform, expenditure is estimated at N17trn, which is 1.9 percent lower than the 2022 budget.

“In other words, not ending the subsidy would necessitate austerity in an economy where government spending accounts for just 6 per cent of GDP,” the analysts said.

As a result, the EIU confirmed that Nigeria’s fiscal position is untenable, despite high international oil prices. It also considered both subsidy and tax reform as inevitable in the medium term.

The EIU further noted that high global oil prices are not translating into the federal government’s receipts because of an expensive petrol subsidy, which the government essentially buys from the national oil company in exchange for income from crude sales.

The research and analysis division of the Economist Group also attributed Nigeria’s dwindling oil output and consequent unsustainability to insecurity in oil-producing areas, and theft and vandalism of infrastructure.

It maintained that the government’s fuel subsidy is clearly unsustainable, given the debt service/revenue ratio, adding that it would not be stopped before the forthcoming general election in February 2023.

The EIU noted that in response, markets have baulked at Nigeria’s fiscal pressures, with credit default swap spreads having soared since April and topped 1,000 basis points in late July, a spread not registered since the depths of the coronavirus pandemic shock in April 2020.

It was also emphasised that restricted access to the international capital market is forcing the Nigerian government to borrow domestically at high interest rates.

Following Nigeria’s current debt-service ratio report, the EIU said it would revise up its fiscal deficit projection of 5.3 percent of GDP in 2022 to closer to 6 percent of GDP.

“In 2023 we expect the end of subsidies, which is expected to bring the budget deficit down, and in the medium term we expect a gradual rise in the rate of value-added tax from 7.5 percent now to 15 percent in 2026,” it stated.