Q1:2020 Debt Report and 2021-2023 MTEF: Nigeria’s Growing Debt Sustainability Risk

The recently published Q1:2020 debt statistics showed a sustained increase in the FG’s debt profile, further putting a dent on debt sustainability even without accounting for the impact of COVID-19 yet. Nigeria’s total public debt as at Q1:2020 rose to ₦28.6tn ($79.3bn) from ₦27.4trn ($79.4bn) as at year-end 2019, with debt to GDP ratio at 19.3% (2019: 19.0%) based on annualised Q1 data.

We note that the devaluation of the exchange rate for translating external debt to ₦361/$ from ₦326/$ as at year-end 2019 mainly drove the increase in debt. Hence, even though external debt (FG & States) remained unchanged at $27.7bn, the naira value rose 10.7% to N10.0tn. The FG’s domestic debt increased 1.4% to ₦14.5tn driven by a sustained expansion in promissory notes by 30.7% to ₦957.2bn as part settlement for outstanding obligations.

While the domestic component of FG’s debt service declined y/y to ₦609.1bn in Q1:2020 from ₦610.2bn, we saw pressures from external debt servicing. The external debt servicing cost rose 32.3% y/y to $472.6m driven by a broad-based increase across commercial, multilateral and bilateral debt. In Naira terms, this translated to an external debt servicing cost of ₦170.1bn which was 55.1% higher than in the corresponding period of 2019 due to the devaluation of the official exchange rate. Given the currency effect, we estimate that FG’s debt mix has improved to 36.5% for external debt from 34.4% in 2019, much closer to the 40.0% target.

Debt Sustainability amid the Revised 2020 Budget and 2021-2023 MTEF
Considering the revenue shock brought by COVID-19 and the resulting record fiscal deficit, we expect the FG’s debt sustainability to worsen in 2020. The Q1:2020 debt data already provided insight into what to expect with debt service to revenue ratio at 99.2% for the FG.  Beyond Q1, there has been little improvement as revenue performance between January and May 2020 was ₦1.5tn, 44.0% lower than projections. With a ₦301.0bn increase in 2020 expenditure to ₦10.8tn to support Nigeria’s COVID-19 response, fiscal deficit is expected at ₦5.0tn in 2020 or 3.6% of GDP, beyond the 3.0% threshold established by the Fiscal Responsibility Act.

We estimate that this would raise public debt to GDP to 24.6% from 19.0% in 2019. The 2021-2023 MTEF also proposes aggressive borrowing plans as the fiscal deficit is expected to reach ₦5.2tn in 2021, driven by revenue and expenditure projections of ₦7.0tn and ₦11.9tn respectively. Without measures to increase revenue and rein in spending through cuts to energy subsidies, we believe FG’s debt sustainability would deteriorate quickly.