Yesterday, President Muhammadu Buhari submitted a request for the approval of additional N2.3tn ($6.2bn) worth of external debt to the senate. According to the request, the loan is aimed at part-financing the N5.6tn budget deficit for 2021 with a critical focus on funding capital expenditure.
Noteworthy to mention, the loan request had been provided for as part of the 2021 appropriation act, thus the current presentation is merely to fulfil legal provisions. Interestingly, the FG recently got approval for $1.5bn and 995.0m Euros worth of multilateral loans a few weeks ago.
Last year, the Federal government relied heavily on a slew of borrowings largely from multilateral organisations such as the IMF, World Bank and AfDB. The huge reliance on the debt market was necessitated by shocks to revenue generation.
Similarly, the FG appears to be leaning heavily towards the external debt market in 2021, to spend its way out of the economic slowdown. However, the concern remains Nigeria’s rising debt sustainability risk.
At the end of 2020, Nigeria’s total debt stock (national & sub-national) stood at N32.9tn (or $86.8bn). The government has historically justified its rising debt profile by the compliant debt-to-GDP ratio of less than 30.0%.
However, we reiterate our position that the FG’s debt service cost as a percentage of revenue is a fairer reflection of the country’s debt sustainability position. This is because a huge proportion of nominal GDP does not contribute to the government’s ability to repay its obligations.
Recently, the pandemic driven revenue shock has exacerbated the already precarious debt service cost to revenue ratio (averaging c.80% in 2020 vs. a historic average of c.55%). Thus, while we recognize deficit spending as a critical fiscal policy tool to drive economic recovery, we think the FG can no longer ignore the associated debt sustainability risk.
