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Why Financial Derivatives Company Thinks Nigeria Should Borrow More Money

Nairametrics by Nairametrics
October 25, 2013
in Uncategorized
Why Financial Derivatives Company Thinks Nigeria Should Borrow More Money
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GDP Nigeria

Nigeria currently has a debt levels equal to about 35% of our GDP (Gross Domestic Product) 5% short of the approved cap of 40% (IMF recently recommended 56%). Some people consider that as too high considering the interest rate we pay on the debt and the fact that most of it is utilised to fund Government recurrent expenditure. However, the Financial Derivatives Company ( a leading financial advisory firm) in its bi-monthly economic and business update thinks Nigeria should actually borrow more. These were their reasons

“For a country like Nigeria that has an infrastructure deficit of $360 billion, according to the African Development Bank (ADB), a 40 per cent debt cap is insufficient in getting the job done. An overhaul of the infrastructure gap would cost approximately $350 billion for an economy with an estimated GDP of $282 billion and an annual GDP growth rate of approximately 6.8 per cent. Therefore, instead of focusing on the rate of increase in debt to GDP ratio in Nigeria, what should be of utmost concern is the direction of the naira. Since most of the recent debt issuance is foreign currency denominated, depreciation of the naira would prove costly, and if sustained, threat of default becomes imminent therefore jeopardising Nigeria’s strong BB- rating.”

FDC also suggest the use of debt to GDP as a benchmark is better for developed economies and not developing economies. Not sure debt hawkish NOI will agree with this report.

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