Figures released by Nigeria’s Debt Management Office (DMO) show that the country’s total national debt has risen steeply by as much as 48% in the last 15 months from N10.9 trillion as of year-end 2015 to N16.2 trillion in Q1:2017.
Despite the stunning debt profile, government has not curtailed its borrowings, which some analysts say could lead to potential debt crisis in the next two to three years of the spate of borrowing is not relaxed.
Following recent improvements in domestic investment landscape at the turn of the year, government returned to the international capital market after a three-year hiatus. It has successfully raising US$1.5bn via Eurobonds and US$300 million in Diaspora bond.
On the domestic front, the DMO has continued with its monthly bond auctions and took it a step further by introducing special bonds like the Savings Bond and a N100 billion Sukuk offering.
The rising debt profile, according to financial analysts is not surprising given the widening budget deficit and large depreciation of the naira in the review period.
It is also reported that the cost of servicing the mounting obligations took up more than 60 percent of revenue in H1:2016 and has become a major source of concern on debt sustainability.
Since the start of a prolonged global oil price drop in H2:2014, the Nigerian economy has recorded a significant downturn in performance as plummeting government revenues and the resultant FX crisis dragged the economy into its first recession in 25 years.
As a result, an expansionary budget of N6.1 trillion was adopted in the 2016 fiscal year to boost growth and fund more capital projects, with a deficit of N1.8 trillion estimated for the period.
The actual implementation of the 2016 budget had the FGN retained revenue falling 18 percent short of target, thus deficit widened further.
In order to plug its budget deficits, the Federal Government embarked on an aggressive borrowing spree and this has been sustained into 2017. To this end, the Debt Management Office (DMO) decided to alter the public debt mix by leveraging on relatively underexplored foreign currency borrowing capacity. Multilateral loans were sought from the AFDB (US$646.6m) in addition to bi-lateral loans from the China EXIM Bank, France AFD and Japan JICA.
The just signed 2017 budget is projecting another record expenditure year, with fiscal deficit estimated at N2.4 trillion with domestic borrowing accounting for 53 percent or N1.3 trillion of the total, while foreign borrowing was projected at N1.1 trillion.
The major argument for increased deficit spending amongst analysts is that the economy is underleveraged with a debt to GDP ratio of 20 percent, but they have often had to ignore the offsetting low non-oil revenue to GDP ratio.
Nigeria’s tax/GDP ratio is 6.0 percent, which is relatively low when compared to SSA peers – South Africa (26.2 percent) and Kenya (15.4 percent).
The nation’s tax collection and administration system is still deemed inefficient with multiple tax system and a high tax evasion & avoidance rate. Despite the recent drive to increase tax revenue, not much has changed in terms of actual results.
In fact, federally collected non-oil revenue fell 4.4 percent in FY:2016 to N3.0 trillion. This had made fiscal authorities to double down on tax reforms including the recently launched Voluntary Asset and Income Declaration Scheme (VAIDS), which grants taxpayers a time-limited opportunity to regularise their tax status without penalty.
Analysts at Afrinvest state that whilst the deficit funded expansionary fiscal policy pursued in 2016 had a positive impact of growth – as seen in GDP by expenditure numbers in 9M:2016 – it has come at a cost as public debt profile has remained on the uptrend over the years.
They pointed out that with the economy challenged, the odds of significantly boosting tax revenue in the near term are slim.
“We expect budget deficits to remain high for the next 2-3 years. What does this imply for medium term debt sustainability? Our opinion on this is a bit nuanced,” they noted, adding that the structure of Nigeria’s public debt is heavily tilted towards the domestic market, up to 77.9 percent of aggregate debt and which in their opinion is easier to deal with in the event of a credit crisis.
“Foreign debt obligations are also mostly multilateral and bilateral in nature (78.0 percent of total foreign debts) which are typically long tenured and granted at concessionary rate. Thus, we do not expect a debt crisis in the near term but policymakers will need to further diversify revenue base or start deleveraging to avert one in the medium term.