Economy & Politics
Nigeria records debt service to revenue ratio of 99% in first quarter of 2020.
This suggests almost all the revenue generated was used to meet debt service obligations.
The rising cost of Nigeria’s debt profile breached a new milestone with the country’s debt service as a percentage of revenue rising to 99% in the first quarter of 2020. This is contained in the Medium-Term Expenditure Framework and Fiscal Strategy (MTEF/FSP) report recently released by the Federal Ministry of Finance, Budget, and National Planning
A cursory review of the data obtained from the MTEF/FSP report shows that in Q1 2020, Nigeria incurred a total sum of N943.12 billion in debt service while the federal government retained revenue was put at N950.56 billion. This implies Nigeria’s debt service to revenue is estimated to be 99% during the period.
This is the highest on record and it suggests almost all the revenue generated from both oil and non-oil sources was used to meet debt service obligations.
Debt service, recurrent expenditure, and Revenue Breakdown
Nigeria like the rest of the world has been battling with the COVID-19 pandemic and was expected to suffer a significant revenue shortfall. However, the data suggests the government may have experienced a significant drop in revenues before the lockdown induced economic downturn indicating that things may indeed be worse than projected.
According to the data, the country earned N950.5 billion in revenue compared to a prorated budget of N1.9 trillion representing a whopping shortfall of 52%. Oil revenue was N464 million representing a shortfall of 30% when compared to budget while non-oil revenue was N269 billion representing a shortfall of 40%.
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Source: MTEF Framework2020-2022.
Despite the revenue shortfalls recorded, government recurrent expenditure (debt and non-debt) remained in line with budgetary expectations. According to the data, debt service for the first quarter of the year rose to N943.1 billion divided into domestic debt (N594.23 billion), Foreign Debt (N129.51), and Interest on Ways and Means (219.38 billion) respectively.
Recurrent non-debt expenditure was N1.1 trillion, largely in line with budget expectations a common feature over the last two decades. However, capital expenditure was N139.7 billion, a whopping 71.3% off target as much needed capital expenditure suffered yet another decline.
Is Nigeria “Bankrupt”?
The continued depletion in Nigeria’s revenue continues to raise questions around the solvency of the Nigerian economy. Generally, debt sustainability can be explained using either debt to GDP or debt service to revenue ratio.
With Nigeria’s total public debt below 30% of GDP, the country’s debt burden appears to be relatively light compared with many other countries. Meanwhile, debt-to-GDP is not regarded as the best indicator of debt sustainability, especially in a country where tax-to-GDP is low. For Nigeria, a better indicator of debt sustainability is the debt service-to-revenue ratio, which in Nigeria has in recent years risen to worrying levels, and now 99% as at Q1 2020
In 2019, former CBN Governor, Sanusi Lamido, declared that Nigeria is “bankrupt and the country is heading to bankruptcy”. This statement credited to the former Emir of Kano State just after the African Development Bank (AfBD) revealed that Nigeria spends more than 50% of its revenue on debt servicing, and this is worrisome.
READ: Evidence that Sanusi is right about Nigeria ‘going bankrupt’
Gloomy Outlook
With the economy likely on the path to a recession, government revenues particularly non-oil revenues could remain depressed this quarter and the next. This means the government will still need to rely on debt borrowing to fund its operations. Just recently, the national assembly approved another $5.5 billion in debt borrowing for the Federal Government piling more pressure on Nigeria’s debt service to revenue ratio.
Though the latest rise in crude oil prices presents a silver lining, Nigeria still faces a cut in its crude oil output and will earn less oil revenue than was projected. The government has also cut its crude oil benchmark as contained in the MTEF.
“Crude oil production volume has been revised downwards from the 2.18 million barrels per day (mbpd) in the 2020 Budget to 1.9 mbpd (out of which 400kbpd is condensate). This reflects recent oil output cut by the OPEC and its allies to stabilize the world oil market. which put Nigeria’s quota at 1.48mbpd, excluding condensates. Oil production averaged 2.1mbpd in the first two months of the year before the collapse in demand and price as most economies went into lockdown.
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Crude oil producers are experiencing great difficulty in selling crude cargoes, resulting in heavy price discounting to attract buyers. Nevertheless, the lower production volume has enabled the NNPC to shut in some very high cost oil wells, and hence lowered the average production cost, from about US$33 to under US$28 per barrel.” MTEF
These challenges also suggest the government may have to rely on funding from the CBN to meet its revenue shortfalls. The government has in the past relied on the CBN Ways and Means to fund recurrent expenditure as it repays with future oil inflows.
The Bottomline: Revenue outlook still muted
According to the Joint World Bank-IMF Debt Sustainability Framework for Low-Income Countries released in 2020, a country’s debt service to revenue threshold should not exceed 23%.
Meanwhile, Nigeria currently stays around 99%. This implies out of every 100 Naira that Nigerian earned in Q1 2020, 99 Naira was spent on servicing debts.
This is an unsustainable model for Nigeria and cannot continue for too long. At some point, the government will have to increase its revenues or face further spending cuts.
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IMF lifts 2021 global GDP growth to 6%
The group also warned that economic recoveries are diverging dangerously across and within countries.
The International Monetary Fund has lifted its global growth outlook to 6% in 2021 (0.5% point upgrade) and 4.4% in 2022 (0.2 percentage point upgrade), after an estimated historic contraction of -3.3% in 2020 due to the effects of the COVID-19 pandemic. This disclosure was made on the organisation’s website on Tuesday.
The group also warned that economic recoveries are diverging dangerously across and within countries, as economies with slower vaccine rollout, more limited policy support, and more reliance on tourism do less well.
READ: Corruption erodes the constituency for aid programmes and humanitarian relief – IMF
What the IMF is saying
“The upgrades in global growth for 2021 and 2022 are mainly due to upgrades for advanced economies, particularly to a sizeable upgrade for the United States (1.3 percentage points) that is expected to grow at 6.4 percent this year.
This makes the United States the only large economy projected to surpass the level of GDP it was forecast to have in 2022 in the absence of this pandemic.
China is projected to grow this year at 8.4 percent. While China’s economy had already returned to pre-pandemic GDP in 2020, many other countries are not expected to do so until 2023.”
READ: Nigeria needs structural and monetary policy reforms to unlock potential – IMF
On divergent recoveries
The IMF stated that divergent recovery paths are likely to create wider gaps in living standards across countries compared to pre-pandemic expectations.
“The average annual loss in per capita GDP over 2020–24, relative to pre-pandemic forecasts, is projected to be 5.7 percent in low-income countries and 4.7 percent in emerging markets, while in advanced economies the losses are expected to be smaller at 2.3 percent,” they said.
“Faster progress with vaccinations can uplift the forecast, while a more prolonged pandemic with virus variants that evade vaccines can lead to a sharp downgrade. Multispeed recoveries could pose financial risks if interest rates in the United States rise further in unexpected ways.“
For Africa, IMF forecasts economic growth of 3.4% in 2021 and 4% by 2022, Nigeria is expected to grow by 2.5% in 2021 and 2.3% by 2022, while South Africa is projected to hit growths of 3.1% and 2.0% for the respective years in focus.
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In case you missed it
The International Monetary Fund (IMF) identified some factors that hamper the economic recovery of low-income countries from the devastating impact of the coronavirus pandemic, factors including access to vaccines, limited policy space to respond to the crisis, the lack of means for extra spending, pre-existing vulnerabilities such as high levels of public debt in many low-income countries and sometimes weak, negative, total factor productivity performance in some low-income countries. These factors continue to act as a drag on growth.
