Quest for FDIs, falling revenue spike debt-service ratio to 62 per cent

Nigeria’s efforts to attract Foreign Direct Investments (FDIs), as well as frequent domestic borrowings at “lofty” interest rates in the last three years, have climaxed at a 62 per cent debt service-revenue ratio in June 2017, against 29 per cent in 2014.

The development, which means that at the moment, more than sixth part of the country’s income will be expended on paying back its obligations, has left paltry fraction for pursuit of growth plans..

The development also showed the level of Federal Government’s low revenue-to-Gross Domestic Product ratio, which experts said would be at four per cent by the end of the year.

Besides, the International Monetary Fund has restated its concern that except Nigeria actually commits its borrowing on infrastructure, the marginal economic rebound that is mostly based on favourable oil price now would still not save the country from any external shock.

However, the widening debt service-to-revenue has now become the rationale for the proposed $5.5 billion eurobond issuance planned before end of year, as a measure to lower high domestic interest rates through reduction of domestic debt/total public debt to 60 per cent, against 70 per cent presently.

While the country’s Monetary Policy Rate had remained at 14 per cent for 14 months in the fight against high inflation caused by foreign exchange crisis, it has helped to attract foreign investments, though at high price.

Investors have been attracted by the high rates above the inflation level, approved by the authorities on the sale of government securities, which continue to accumulate huge service bill.

Sub-Saharan Africa Economist, at RenCap, Yvonne Mhango, in a report titled: “Nigeria: Fiscal operations in 7M17- Capex-Light and Debt Service-Heavy”, said that although the country’s public debt-to-GDP is low when compared to the sub-region’s average of 45 per cent, it has seen a strong increase in recent years.

“Since 2014, it has risen by seven percentage points of GDP to 16.4 per cent in June 2017. By our estimate, 70 per cent of this increase was due to domestic debt.

“Government’s domestic debt has increased by four percentage points of GDP since 2013, to 10 per cent in June 2017. The states’ domestic debt saw its biggest annual increase this decade in 2015, when it jumped to 2.1 per cent of GDP, against 1.4 per cent in 2013.

“It edged up further to 2.5 per cent in 2016 and has since peaked. External debt saw a significant percentage point of GDP increase in the first half of 2017, partly due to a $1.5 billion eurobond issuance. External debt now accounts for 25 per cent of public debt, against 19 per cent in 2016,” she said.

A further analysis showed that as at July 2017, the Federation Account’s revenue was one-third below its N7.8 trillion target, as oil revenue expected to bring two-third of the target came in 37 per cent below projections, while the non-oil revenue also faltered by 30 per cent.

Consequently, Federal Government’s revenue allocation from the Federation Account was 55 per cent below target, at N855 billion as at July, a shortfall that must be borrowed to sustain growth plans, with cost implications.

But the Minister of Finance, Mrs. Kemi Adeosun, said the current challenge of debt service is more about the legacy debts that have been contracted before this current administration.

Noting that there is a clearly followed rule in obtaining loans, particularly, the state governments, she said that if Debt Sustainability Analysis shows that repayment is more than 40 per cent of states’ revenue, it would be turned down.

“Fundamentally, we must invest. We don’t have the power we need. We don’t have the roads yet and there is a lot of money required to fund these projects.

“We are working with the National Assembly to refinance some of our naira debts. What we are trying to do is that as treasury bills mature, we refinance them longer and lower, with borrowing plans that are as low as six per cent.

“If we are able to move our tax-to-GDP ratio from just six per cent, to 10 per cent, that would have a wider effect on the economy- reduce borrowing and bring down interest rate. It will also create head-room for the private sector to borrow, because they are currently being crowded out.