Much has been said on Nigeria’s aggressive borrowing spree from domestic and international capital markets since 2016, and deservedly so. 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 N6.1tn was adopted in the 2016 fiscal year to boost growth and fund more capital projects, with a deficit of N1.8tn estimated for the period. No thanks to the resumption of oil militancy in February 2016 and substantial underperformance of non-oil revenue relative to projections, actual FGN retained revenue was 18.0% short of target, thus deficit widened further. In order to plug this deficit, 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. Following improvements in domestic investment landscape at the turn of the year, Nigeria returned to the International capital market after a 3-year hiatus, successfully raising US$1.5bn via Eurobonds and US$300.0m in diaspora bond. On the domestic front, the DMO has continued with its monthly bond auctions and took it a step further by introducing atypical bonds such as the Savings Bond and a N100.0bn Sukuk offering closing today.
The 2017 budget is projecting another record expenditure year, with fiscal deficit estimated at N2.4tn - domestic borrowing accounting for 53.0% (N1.3tn) of the total while foreign borrowing was projected at N1.1tn. 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.
According to the DMO, FGN total debt stood at N10.9tn as of year-end 2015 but has risen an astonishing 48.1% in 15 months to N16.2tn in Q1:2017. The rising debt profile is not surprising given the widening budget deficit and large depreciation of the Naira; however, the cost of servicing the mounting obligations took up more than 60.0% of revenue in H1:2016 and has become a major source of concern on debt sustainability. The major argument for increased deficit spending is that the economy is underleveraged with a debt to GDP ratio of 20.0%, but also hard to ignore is the offsetting low non-oil revenue to GDP ratio. Nigeria’s Tax/GDP ratio is 6.0%, which is relatively low when compared to SSA peers - South Africa (26.2%) and Kenya (15.4%).
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% in FY:2016 to N3.0tn. To their credit, fiscal authorities have doubled 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.
However, with the economy challenged, the odds of significantly boosting Tax revenue in the near term is slim and 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. The structure of Nigeria’s public debt is heavily tilted towards the domestic market (up to 77.9% of aggregate debt) and this easier to deal with in the event of a credit crisis. Foreign debt obligations are also mostly multilateral and bilateral in nature (78.0% 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.