Debt Report: Wide Fiscal Financing Gap and Currency Devaluation Induce Higher Debt Burden

The Q2:2020 debt data recently published by the Debt Management Office (DMO) revealed that Nigeria’s public debt stock grew 20.6% y/y and 8.3% q/q to ₦31.0tn ($85.9bn). This translates to a debt to GDP ratio of 20.4% based on 2020 GDP estimate, from 19.0% as at year-end 2019. The strong increase in the public debt stock was driven by the devaluation of the official exchange rate from N306.00/$1.00 to N361.00/$1.00 as well as external and domestic borrowing used to plug the large fiscal deficit brought by the COVID-19 pandemic. FG’s Budget support loan of ₦1.2tn ($3.4bn) was accessed from IMF’s Rapid Financing Instrument (RFI) in April 2020, which in addition to currency devaluation resulted in a 36.5% y/y and 13.8% q/q rise in external debt (FG & States) to ₦11.4tn ($31.4bn).

Overall, FG’s external debt stock increased 18.9% y/y ($4.3bn) to $27.2bn while the local currency value increased 40.1% y/y to N9.8tn. Although the external debt of States remain unchanged at $4.3bn, the local currency value rose 17.5% y/y to N1.5tn. Similarly, FG’s domestic debt grew 15.2% y/y and 6.9% q/q to ₦15.5tn as the DMO ramped up domestic borrowing to plug budget deficit given low yields in the fixed income market. The growth in domestic debt reflected an increase of 81.3%, 34.5% and 16.0% y/y in outstanding Sukuk, promissory notes and bonds to ₦362.6bn, ₦951.7bn and ₦11.2tn respectively. Meanwhile, the domestic borrowing for States rose 2.0% to ₦4.2tn.

In terms of debt servicing, total payments in Q2:2020 rose 42.6% on a y/y basis to ₦416.4bn, driven by both domestic and external debt. FG’s domestic debt servicing burden rose strongly by 45.6% y/y to ₦312.8bn from ₦214.8bn in the preceding year. Similarly, external debt servicing cost increased 13.8% y/y to $287.0m from $252.3m in Q2:2019, reflecting multilateral and bilateral debt service obligations. Given the devaluation of the official exchange rate, the increase in external debt service payments in local currency terms was stronger at 34.0% y/y to ₦103.6bn.

The increase in debt servicing burden suggests that FG’s debt service to revenue ratio would continue to worsen, especially given weak revenue growth and further currency devaluation to N381.00/$1.00 in Q3:2020. We highlight that the ratio increased to 72.2% as at May 2020 from 59.6% as at year-end 2019. This is unsurprising as our concerns about the devaluation impact of the aggressive binge in external loans since 2017 have been justified. We note that the share of external debt in total debt for the FG has now reached 38.9%, closer to the FG’s target of 40.0%. This should prevent the issuance of further external loans given the strong chance of further currency adjustments.

Notwithstanding, we expect a sustained rise in the FG’s external debt stock given additional budget support of $2.1bn yet to be disbursed by the World Bank, AfDB and the Islamic Development Bank. Looking forward, we expect more domestic debt issuances to bring down the share of external debt and lower devaluation risk. On a brighter note, we believe the removal of energy subsidies (electricity and petrol) could herald a new fiscal era which would ease FG’s expenditure burden, freeing up resources for investment in critical sectors.