Analysts have attributed the increasing debt burden to the devaluation of the naira from N306/$ to N361/$ and continuing financing gap in the budget.
The second quarter of 2020 debt data recently published by the Debt Management Office (DMO) revealed that Nigeria’s public debt stock grew 20.6 per cent y/y and 8.3 per cent quarter-on-quarter (q/q) to N31.0 trillion ($85.9 billion). This translates to a debt to GDP ratio of 20.4 per cent based on 2020 GDP estimate, from 19.0 per cent as at year-end 2019.
Analysts from Afrinvest said, the strong increase in the public debt stock was driven by the devaluation of the official exchange rate from N306.00/$ to N361.00/$ as well as external and domestic borrowing used to plug the large fiscal deficit brought by the COVID-19 pandemic.
FG’s Budget support loan of N1.2 trillion ($3.4 billion) was accessed from International Monetary Fund (IMF)’s Rapid Financing Instrument (RFI) in April 2020, which in addition to currency devaluation resulted in a 36.5 per cent year-on-year (y/y) and 13.8 per cent q/q rise in external debt (FG & States) to N11.4 trillion ($31.4 billion). Overall, FG’s external debt stock increased 18.9 per cent y/y ($4.3 billion) to $27.2 billion while the local currency value increased 40.1 per cent y/y to N9.8 trillion. Although the external debt of States remain unchanged at $4.3 billion, the local currency value rose 17.5 per cent y/y to N1.5 trillion.
Similarly, FG’s domestic debt grew 15.2 per cent y/y and 6.9 per cent q/q to N15.5 trillion as the DMO ramped up domestic borrowing to plug budget deficit given low yields in the fixed income market. The growth in domestic debt reflected an increase of 81.3 per cent, 34.5 per cent and 16.0 per cent y/y in outstanding Sukuk, promissory notes and bonds to N362.6bp billion, N951.7 billion and N11.2 trillion respectively. Meanwhile, the domestic borrowing for States rose 2.0 per cent to N4.2 trillion.
In terms of debt servicing, total payments in the second quarter of 2020 rose 42.6 per cent on a y/y basis to N416.4 billion, driven by both domestic and external debt. FG’s domestic debt servicing burden rose strongly by 45.6 per cent y/y to N312.8 billion from N214.8 billion in the preceding year. Similarly, external debt servicing cost increased 13.8 per cent y/y to $287.0 million from $252.3 million in the second quarter of 2019, reflecting multilateral and bilateral debt service obligations. Given the devaluation of the official exchange rate, the increase in external debt service payments in local currency terms was stronger at 34.0 per cent y/y to N103.6 billion.
The increase in debt servicing burden suggests that FG’s debt service to revenue ratio would continue to worsen, especially given weak revenue growth and further currency devaluation to N381/$ in third quarter of 2020. We highlight that the ratio increased to 72.2 per cent as at May 2020 from 59.6 per cent as at year-end 2019. This is unsurprising as our concerns about the devaluation impact of the aggressive binge in external loans since 2017 have been justified. We note that the share of external debt in total debt for the FG has now reached 38.9 per cent, closer to the FG’s target of 40.0 per cent. This should prevent the issuance of further external loans given the strong chance of further currency adjustments.
“Notwithstanding, we expect a sustained rise in the FG’s external debt stock given additional budget support of $2.1 billion yet to be disbursed by the World Bank, AfDB and the Islamic Development Bank. Looking forward, we expect more domestic debt issuances to bring down the share of external debt and lower devaluation risk. On a brighter note, we believe the removal of energy subsidies (electricity and petrol) could herald a new fiscal era which would ease FG’s expenditure burden, freeing up resources for investment in critical sectors”.