There is a glimmer of hope for Nigeria to finance capital projects and plug the deficit in its budget through borrowing. Nigeria’s low debt to Gross Domestic Product (GDP) ratio means the chances of getting the $1 billion loan facilities it seeks from the Africa Development Bank (AFDB) are high.
The debt level of Africa’s largest economy is 10.50 percent, which is lower than the 17 percent and 18 percent of GDP of 54 countries across Africa.
Government debt as a percentage of GDP is used by investors to measure a country’s ability to make future payments on its debt. Debt to GDP ratio therefore affects the country’s borrowing costs and government bond yields.
The decision this month by the Monetary Policy Committee (MPC) to embrace a flexible exchange rate regime and the May 11 partial deregulation of the downstream petroleum sector helped usher a drop in bond yield as investor interest in the market improved.
Nigeria intends to plug the gap in the 2016 budget of N6.03 trillion by borrowing about $10 billion in local and foreign currency. The fiscal deficit may be as high at N3 trillion. There are indications that more money will have to be borrowed in the near future given the country’s decrepit infrastructure. The country would need $166 billion to meet its energy and transport infrastructure in the next five years. This represents 32.54 percent of GDP.
We believe Nigeria will have to take advantage of its favourable debt to GDP ratio if it is to plug its huge infrastructure deficit.