Analysts Worries, Gives Pathways To Debt Sustainability

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Analysts have implored the Federal Government and sub-nationals to reduce recurrent expenditure, especially cost of governance, to accommodate more capital projects that could raise government revenue capacity in the near term through tax, and reduce the imminent debt sustainability risk.

They cautioned that the government bloated borrowing would have a debilitating impact on the size of Nigeria’s debt-service allocation in the subsequent fiscal budget.

They said that the new borrowing request which is coming barely a month after the Federal Government finalised plans to raise US$3.0bn in Eurobond by October 2021, in line with the budgeted external borrowing plan of US$6.2bn or N3.2tn for 2021 portends danger signals to fiscal sustainability threshold of 40.0%.

They emphasised that the sum of government external borrowings, the Eurobond and the fresh request, no doubt would exceed the budgeted amount both in US dollar and Naira terms by 28.3% apiece.

Besides, the analysts told Daily Independent that, while the current size of both the national and Federal Government’s debt stock as a percentage of GDP, using 2020 nominal GDP of N152.3tn, remain at a sustainable level of 23.3% and 19.4% respectively compared to the IMF’s threshold of 35.0% , for Low-Income Countries like Nigeria, and DMO’s fiscal sustainability threshold of 40.0%, the current debt service-to-revenue ratio paints a different picture.

“This is a pointer of grave consequence of fiscal years ahead as the current mix of both the national and Federal Government’s debt stock have deviated from the 2020-2023 Medium Term Expenditure Framework (MTEF) recommendation”, they said.

President Muhammadu Buhari had last Monday wrote to the National Assembly (NASS) to approve fresh external borrowings of US$4.1bn and N710.0m as part of plans to plug the deficit in the 2021 budget, initially estimated at N5.6tn.

The new borrowing request is coming barely a month after the Federal Government finalised plans to raise US$3.0bn in Eurobond by October 2021, in line with the budgeted external borrowing plan of US$6.2bn (or N3.2tn) for 2021.

The analysts argued that the sum of these external borrowings (the Eurobond and the fresh request from the estimate would exceed the budgeted amount both in US dollar and Naira terms by 28.3% apiece.

While using the US Fed average Dollar-to-Euro exchange rate of US$1.18/N1.00 to harmonise the Euro-denominated component of the loan request, analysts argued that “the sum of the external borrowings would amount to US$8.0bn, as against the US$6.2bn budgeted”.

“In Naira term, this will translate to N3.3tn at the new official rate of N411.50/US$1.00 and N3.0tn the old official rate of N379.00/US$1.00”, they said

It would be recalled that in 2020, the Federal Government expended 82.9% of her N3.9tn retained revenue on debt servicing.

“This ratio further worsened to 97.7% according to the January to May 2021 budget implementation report, as Federal Government spent N1.80tn of her N1.87tn realised revenue on servicing debt.

“The current mix of both the national & Federal Government’s debt stock have deviated from the 2020-2023 Medium Term Expenditure Framework (MTEF) recommendation”, analysts said.

Ms. Patience Oniha, the Director-General of the Debt Management Office, DMO, last week revealed that the country’s public debt stock stood at N35.465 trillion as of June 30.

Oniha, in a virtual media chat, said the country risked the debt sustainability issue if it failed to grow the current low revenue profile, which places the country in the poorest category among its peers.

“We should focus on revenue. The good thing about it is that the Minister of Finance, Budget and National Planning has started a programme aimed at growing the revenue profile.

“We must discipline ourselves to follow through to grow our revenue. If we continue to borrow and do nothing about growing our revenue base as other countries have done, we may have a debt sustainability challenge,” she said.

Dr. Muda Yusuf , Economist & former Director General LCCI, in his comments on Federal Government debt sustainability, told Daily Independent that the rising debt profile of government raises serious sustainability concerns, although government tends to argue that the conditions was not a debt problem, but a revenue challenge.

Yusuf said: “But the truth is that debt becomes a problem if the revenue base is not strong enough to service the debt sustainably. It invariably becomes a debt problem.

“What is needed is the political will to cut expenditure and undertake reforms that could scale down the size of government to reduce governance cost and ease the fiscal burden on government.

“It is important to ensure that the debt is used strictly to fund capital projects that would strengthen the productive capacity of the economy. This is position of the Fiscal Responsibility Act.

“Additionally, emphasis should be on concessionary financing, as opposed to commercial debts which are typically very costly.

He, however, said: “It is imperative for the country to operate as a true federation which it claims to be. The unitary character of the country is making it difficult to unlock the economic potentials of the subnationals. It is perpetuating the culture of dependence on the federal government”.

Dr. Timothy Olawale, Director General at Nigeria Employers’ Consultative Association (NECA), told Daily Independent that over the years, the Federal Government has struggled to finance its budget mainly due to low revenue, which is susceptible to oil price volatilities and other structural deficiencies.

He said this has resulted in an increasing budget deficit for the country and increased borrowing by the government from both domestic and international bodies.

He added: “As at the end of March 2021, the nation’s public debt stood at a total of over N33.tn and with the planned borrowing of N4.69tn to finance the budget deficit, total public debt is expected to rise to N36.89tn by December 31, 2021. In the face of this, there is the discussion of financing the issuance of $6.2b eurobond which may likely resort to sourcing the fund from the country’s foreign reserves”. “Notwithstanding the fact that there is the provision for external borrowing in the 2021 Appropriation Act, we are increasingly concerned about the country’s debt service to revenue ratio which shows the country may be heading towards a devastating debt crisis should the borrowings continue in face of limited finances to support existing debt obligations.

“We note that the Federal Government typically exceeds its budgeted deficit for a budget year. This is amidst our pessimism on the Federal government’s ability to achieve its Revenue target of N7.99tn in 2021”.

‘’Continued government borrowing to finance budget deficits leads to higher government debt. It will also mean that there will be more government expenditure on interest payments in future budgets to service the debt. The lack of government control over its expenditure, growth rate of government revenue and economic development pace are the major structural factors deepening the deficit gap of the Nigerian economy”.

Mr. Friday Udo, South-South Coordinator of Institute of Chartered Economists of Nigeria (ICEN), in has comments, told Daily Independent that the current mix of both the national and Federal Government’s debt stock has completely deviated from the 2020-2023 Medium Term Expenditure Framework (MTEF) recommendation.

He emphasised that the cap for the domestic-to-external debt mix according to the MTEF was set at 70.0:30.0. as against what is currently on the table of the Federal Government.

“We believe this was done to mitigate exposure to dollar-denominated debt, which spiked due to exchange rate devaluation.

As the current mix of both the national and FG’s debt printed at 61.4:38.6 and 60.3:39.7 at the end of H1:2021 respectively, we expect this to further worsen by year-end, as inflows from the fresh borrowings add to existing stock”.

Auwal Musa (Rafsanjani), Executive Director of Civil Society Legislative Advocacy Center (CISLAC), told Daily Independent that it was obvious that increasing tax and oil revenue has not necessarily helped in the budget finance gap, and to the extent that the penchant for unaccountable expenditure.

He said the government needs to focus its expenditure on capital projects expected to generate cash flows for the economy.

He added: “Also, there is the need for more collaboration between the private sector and the government to ease the burden of increasing costs borne by the government. Attention must be paid to the efficiency and effectiveness of government spending. In addition, the government should sell moribound assets to finance its expenditure”.

Afrinvest analysts in their weekly update on Fresh External Borrowing Request: Is FG Still Guided By The Budget Provision of last week on Federal Government’s new external borrowing request and Nigeria’s debt numbers for H1:2021 as announced by the Debt Management Office (DMO).

They stated that Nigeria’s total debt stock rose N2.4bn in Q2:2021 to N35.5bn was mainly on the account of an estimated 7.8% increase in Federal Government’s domestic debt stock in Q2:2021 to N17.8tn and exchange rate devaluation impact on the foreign debt component.

“Equally concerning is the current mix of both the national & FG’s debt stock, as they have deviated from the 2020-2023 Medium Term Expenditure Framework (MTEF) recommendation”, they said.

Afrinvest Analysts, argued that the cap for the domestic-to-external debt mix according to the MTEF, was set at 70.0:30.0.

“We believe this was done to mitigate exposure to dollar-denominated debt, which spiked due to exchange rate devaluation.

“However, the current mix of both the national and FG’s debt printed at 61.4:38.6 and 60.3:39.7 at the end of H1:2021 respectively. We expect this to further worsen by year-end, as inflows from the fresh borrowings add to existing stock.

“Consequently, we recommend that the FG and sub-nationals prune recurrent expenditure (especially, cost of governance), to accommodate more capital projects that could raise government revenue capacity in the near term (through tax or levy) and reduce the imminent debt sustainability risk”.

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