History and debt evolution in Nigeria
Before the debt pardon in 2005, Nigeria’s public debt of US$ 46.2 billion (excluding contractor and pension arrears) was equivalent to 64.3% of GDP. External debt stood at $ 35.9 billion while the stock of the domestic debt amounted to $ 10.3 billion. Following the debt pardon, external debt fell to $ 3.5 billion, while domestic debt rose to $ 13.8 billion in 2005, giving a total public debt of $ 17.3 billion and a debt-to-GDP ratio of 11.8%.
By 2011, the domestic debt stock had grown substantially to $ 42.23 billion, while the external debt remained at a marginal $ 5.67 billion, giving a total public debt stock of $ 47.9 billion or 21% of GDP. GDP also grew simultaneously as debt was growing, hence debt-to-GDP ratio was modest.
The highlight of Nigeria’s debt history has been the increasing role of domestic debt. The increasing profile of the domestic debt was an intentional policy direction of “the Federal Government aimed at deepening the Nigerian debt markets and generating a yield curve which would help borrowers to access funds at affordable rates”, said Finance Minister Ngozi Okonjo-Iweala. It was also to enable investors make informed decisions.
Also, becoming external-debt shy after the debt pardon, the Federal Government relied increasingly on the domestic markets to finance budget deficits and meet increased budget expenditures. In 2010, the 53% salary increase for civil servants was financed by raising domestic bonds. Borrowing for recurrent expenditure or consumption was a persistent trend during this period, though it was frowned on by the finance minister.
Nigeria’s 2014 debt profile snapshot:
Nigeria’s GDP, post-rebasing, stands at $ 516.3 billion, (N80.09 trillion) with a total public debt of $ 66.9 billion (N10.4 trillion, N155.73 / $ 1), DMO’s Q2 numbers show. Debt-to-GDP ratio, stands at 13.0% of GDP. The rebased GDP figures have significantly driven down the debt-to-GDP ratio. External debt-to-GDP ratio, which measures the indebtness of the country to the world, and its ability to repay stands at 1.9% of GDP.
The total external debt composition stands at $ 9.3 billion, 14.01% of total public debt, while the domestic debt of $ 57.6 billion comprises the remaining 86% of total public debt.
Of the total external debt of $ 9.38 billion, the World Bank Group is being owed $ 5.86 billion; the African Development Bank Group $ 866.11 million; EXIM Bank of China $ 1.03 billion; French Development Agency $ 108.95 million; EuroBond debt $ 1.5 billion and ZTE Corp $ 5.88 million
Total domestic debt stands at $ 57.6 billion (N9.33 trillion). Of this amount, Federal Government Bonds (FGN Bonds) comprised 58.55%, Nigerian Treasury Bills (NTBs) comprised 36.87%, and Treasury Bonds 4.25%. All according to Q2 (June) data.
Debt Sustainability Analysis
In Q1 2014, external debt service to debt stock ratio was 1.3%
Despite the clamour among media circles about the Nigerian public debt reaching record levels of N10.4 trillion, official data suggests that public debt remains within the bounds of prudency.
Economic theory has not specified an ideal debt-to-GDP ratio. Different prevailing economic circumstances have typically dictated the ideal. Instead, more emphasis has been placed on the sustainability of public debt. Among most economic circles, if a country can continue to successfully pay the interest on its debt (debt servicing) without resorting to a debt refinancing, then the debt is considered stable. Also, if the total public debt is not an encumbrance to further economic growth, then the long term health of the economy isn’t in question.
Going by this parameter, if government debt crowds out private sector investment, then danger looms.
Current Analysis, so far so good
No doubt, Nigeria’s public debt position has been further strengthened by the rebasement of GDP. Total debt service payments (domestic debt plus external debt) as a percentage of 2014 rebased GDP has remained under the 1% threshold as table 1 shows.
Before rebasing, Nigeria’s domestic debt was already about 18 percent of GDP in 2012 and external debt was 2.5 percent of GDP, still lower than its peers.
External debt servicing as a percentage of total external debt has also remained low, below 4%, looking at figures for the last 5 years. This is because the bulk of Nigeria’s external loans are made up of concessional loans from Development Finance Institutions like the World Bank and the African Development Bank which typically are long term. Concessional loans account for 71.78% of total foreign loans as at June 2014. Bilateral loans account for 12.17%, while Foreign Commercial loans, which are considered the most dangerous, account for the rest 16.06%. These figures indicate a very healthy foreign debt portfolio, and they have been a major attraction to foreign investors round the world. In 2013, Nigeria’s $ 1 billion Eurobonds was four times oversubscribed on the international market.
CBN data show that Nigeria’s foreign reserves stand at $ 39.62 billion. This suggests that adverse short term economic trends can be contained.
In the near term, the favourable trend is expected to continue barring any abnormalities.
Possible danger signs?
The positive outlook for Nigerian public debt is however tempered by possible negative probabilities. The greatest threats to Nigeria’s public debt position continues to lie in the unaddressed economic fundamentals underpinning economic performance. Nigeria’s Eurobond rating of BB- by both Fitch Ratings and Standard and Poors best points to the potential dangers the economy faces. A ‘BB-‘ rating means that the “obligor (issuer) is LESS VULNERABLE in the near term than other lower-rated obligors, but faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitments”.
Oil price volatilities and falling oil revenues
Among the list of things that could possibly go wrong, the most threatening is the damning vulnerability of the Nigerian government to oil price shocks.
With world oil supplies now at record levels, international oil price is expected to drop sharply in the near term. The entrance of Shale oil has seen the USA significantly reduce its purchases of Nigerian oil, and go on to become a net exporter of oil. In Africa, Libya also reopened its Ras Lanuf port after regaining it from rebels a year ago. Also, other African countries are stepping into the oil and gas supply scene (Angola, Ghana, Kenya, Uganda, etc). The stalling of the PIB has further stunted the growth of the Nigerian oil and gas industry. Recent trends in the industry have featured divestments away from the country by IOCs, and postponed investments in the sector (both definitely and indefinitely).
“The Atlantic market is currently so well supplied that incremental Libyan barrels are reportedly having a hard time finding buyers”, the International Energy Agency, a Paris-based adviser on energy policy to 29 nations, said in its monthly report. “Many in the market seem more focused today on short-term downward price pressures from a further increase in Libyan production than on upward price pressures as might result from an escalation of fighting”, the IEA said.
The IEA has warned that “Libya will struggle to find buyers for its oil”
Low tax revenue
The Nigerian government has not succeeded in diversifying its resource avenues away from oil, though the economy is well diversified. “With oil accounting for more than 85% of exports and roughly two thirds of Nigeria’s fiscal revenues, any material decline in would quickly translate into economic and fiscal deterioration” said Matt Robinson, a Senior Credit Officer at Moody’s Investors’ Service.
Increasing domestic debt servicing costs
Domestic debt servicing costs have been high, compared to the cost of servicing external debt. The government has had to pay yields of between 10% – 12% for borrowing in the domestic market as compared to between 5% -6% for its Eurobonds.
With inflation rate hovering around the 8% mark, and government bond yields ideally pegged to it, the government can’t fare any better.
The high cost of government borrowing has also served to crowd out private investment which could have been deployed into more productive uses. With coupon rates at 11% investment managers have looked to government securities to grow the asset portfolio
The most advanced economies are often characterised by their excessive total debt figures. USA has 106.5%, the UK 90.3%, Germany 81.9% France 90.29%, and the highest in the known world, Japan with 240%. The key determining factor of the sustainability of a nation’s debt is the resilience of the economy from both internal and external pressures. Japan, with the highest public debt in the world is not in a crisis because the markets are still confident in its economy, and its domestic markets are shielded from adverse external pressures. The yield on its sovereign bonds, being very low, signals that its risk profile is still perceived to be low despite its monstrous level.