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Debt Sustainability: Nigeria’s Two-Track Projections

The National Assembly has now set up a committee to review the request of the Federal Government (FG) to securitize the government’s overdraft with the Central Bank of Nigeria (CBN). According to the Director General of the Debt Management Office (DMO), the move by the FG was meant to increase transparency over the national debt situation. Previously the debt profile of the country (N44.1tr as of 2022) had excluded the CBN’s Ways and Means (W&M) component. 

But the Minister of Finance, Zainab Ahmed, while presenting the approved 2023 budget noted that the CBN had a W&M federal government overdraft of N22.7tr (as of 2022) owed to the CBN and financed at MPR +3% (presently 19.5%). The government planned to save between 1.8trn and 2trn by converting the existing loans to a 9% 40-year treasury instrument with a three-year moratorium. 

The 2023 budget plans a debt servicing cost of N6.31tr. As troublesome as this is, analysts have other concerns:

  • The country’s debt stock which was N44.1tr would rise to N77tr
  • Debt-to-GDP ratio which was 22.97% as of 9M 2022 would rise to 35%
  • Debt service-to-Revenue ratio which rose to 80.7% (11M 2022) would remain high in 2023 at 57% (assuming 100% revenue performance).
  • Revenue performance was 87% as of 11M 2022, if we assume the same performance in 2023, projected revenues for 2023 would come to N9.12tr while the ratio of Debt service-to-Revenue would rise from 57% in the base case to 69%
  • The recourse to the domestic debt market means that private-sector borrowing would be crowded out

The larger debt repayment burden implies that higher future taxes are in the offing (see chart below).

Chart 1:

With FG debt mounting and its revenue buckling, there is apprehension amongst Nigerians who expect higher future taxes to meet the repayment burdens. But analysts note that ahead of the country lie two paths; a scenario of high liquidity called ‘Eldorado’, and the other of insolvency called ‘Doomsday’.

In the doom and gloom scenario, the FG would continue:

  • To rely on revenue from oil exports and royalties from the National Oil company
  • To borrow at a higher cost through the issuances of IOU and Promissory notes
  • To rely on taxes as a means of raising revenue, especially while the businesses and economic units concerned operate in contracting sectors.
  • To refuse to issue licenses in growing sectors while failing also to offer equity investment opportunities in government-owned assets and companies to domestic investors

In the Eldorado scenario:

Nigeria opens its foreign investment deal book and aggressively increases its deal count. India presents a perfect example. The Southeast Asian economy a few years ago offered deals in 15,000 assets seeking to earn $1.9tr in FDI which translated to $100bn annual target. Saudi Arabia also adopted a similar model, after launching its 2030 National Transformation Plan in 2017, seeking $200bn in FDI it opened deal opportunities in 16 different sectors. By adopting a similar strategy, the federal government:

  • Would substantially increase its Revenues through the issuance of Licenses for greenfield investment in critical sectors.
  • Would open equity investment opportunities in government-owned assets and companies through the listing of the same and thereby determining their market values and subsequently recording portfolio gains 
  • Reduce the cost of borrowing by exploring better debt management strategies namely borrowing against the government’s financialized assets rather than borrowing against revenues from crude oil sales that are volatile and declining.
  • Increase the accretion to the reserves to improve external sector liquidity and reduce domestic inflation (see illustration below)

Thinking Differently

In the general scheme of things to navigate out of the current fiscal challenges, the federal government needs to rethink its fiscal strategy by shifting away from the traditional income statement approach to fiscal management to a balance sheet-centred approach. 

Adopting the same worn-out approach of the past while hoping to see improved results is unwise. Indeed, Albert Einstein observed that repeatedly doing the same thing while expecting different results is the definition of madness. 

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