Nigeria’s Mounting Debt Burden Vs Contracting Capital Inflows

The Debt Management Office (DMO) noted in a publication this week that Nigeria’s total debt (external and domestic) rose 12.1% Y-o-Y or N1.4tn to N12.6tn (US$65.4bn) in 2015, relative to N11.2tn (US$67.7bn) in 2014. Federal Government (FG) debt worth N10.1tn (US$52.2bn) accounted for 79.8% while State Governments debt (N2.5tn or US$13.2bn) accounted for 20.2% of the total debt. External debt amounted to N2.1tn (US$10.7bn) representing 16.8% of total debt stock. This comprises of US$7.6bn (70.5%) loan from World Bank group, while Bilateral funding from Chinese Exim Bank and Eurobond accounted for about 13.0% apiece. On the other hand, Domestic debt which amounted to N10.5tn (US$54.5bn) contributed the bulk of 83.2% to the country’s debt stock.

Based on annualized nominal GDP of N92.4tn at Q3:2015, Nigeria’s debt to GDP ratio inched higher to 13.6% in 2015 from 12.1% in 2014. Extending this analysis to the 2016 Appropriation Bill with planned borrowing of N1.8tn - domestic (N984.0bn) and foreign borrowing (N900.0bn), and a tepid nominal GDP growth projection, debt to GDP ratio will increase further in 2016.

Although the debt to GDP ratio appears low (relative to a legislative cap of 30.0%), the increasing debt servicing obligation as a proportion of total expenditure and against a low revenue base pose a challenge to debt sustainability. Debt service as a proportion of total expenditure will settle at 22.4% in 2016 from 18.8% proposed in the 2015 budget and actual of 27.7% based on 9M: 2015 budget performance. Debt servicing to revenue will moderate slightly to 35.3% in 2016 from 39.0% in 2015. Yet, a counter-cyclical fiscal policy (with a bias for capital projects) is needed to boost the flagging economy but with servicing obligation is already high and oil revenue outlook weak, the need for cheap facilities with long tenors (especially from multilateral loans) becomes more urgent.

However, in order to access these concessionary facilities, monetary and fiscal policies would need to be aligned with current realities to improve the country’s credit worthiness. This would involve more flexibility in monetary policy and unlocking non-oil revenue potential to cushion the impact of the debt burden in the medium to long term.

At the state level, Sub-National debt stock amounted to N1.7tn in 2015 with Lagos state having the lion share of 35.8%, Kaduna and Edo States trailed with 6.7% and 5.0%respectively. State debt will also rise in 2016 as news flows currently suggest that more states are planning to secure loans. However, the viability of many of these States remain a concern as their capacity to generate IGR are yet to be addressed. Save for Lagos State (N276.1bn ) and perhaps Rivers  (N89.1bn) and Delta (N42.1bn) whose IGR represented 39.0%, 12.6% and 6.0% of total for all the 36 States as at 2014 in that order, poor capacity as seen in 2015 in many of the States implies that another bailout maybe imminent if IGR capacity remains unchanged.
In a related note, the National Bureau of Statistics released a report on Nigerian Capital Importation for FY: 2015. Unsurprisingly, capital inflows declined 53.8% Y-o-Y to US$9.6bn from $20.8bn in 2014. Foreign Portfolio Investment (FPI) accounted for 62.3% of total capital imported while Other Investments and Foreign Direct Investment (FDI) accounted for 22.7% and 15.0% respectively. The above is largely attributable to foreign exchange concerns coupled with blurry fiscal pronouncements in 2015 which created disincentives for foreign capital inflows and resulted in huge outflows during the year. Reviewing the implication of slowing foreign capital vis-à-vis increasing debt profile as well as government’s borrowing plans, we reiterate the need for a reassessment of current monetary policy stance on foreign exchange and policy harmonization with the fiscal team to attract capital inflow and improve reserves position.

Afrinvest Research