Dealing with growing federal government debt for budget financing

The Debt Management Office (DMO) released the country’s debt stock last week, bringing Nigeria’s total borrowing as of June 30, 2022 to 42.8 trillion naira, an increase of 20.8 in year-on-year and 3.0% quarter-on-quarter.

The debt level, which is the highest ever recorded by the country, continues to be a trending topic of discussion. Many analysts continued to wave the banner of the impending catastrophe the country could be thrown into in the face of accumulated debt and a lack of political will to make the tough decisions before the elections.

Although the federal government had previously targeted a reduction in domestic borrowing, the new record debt profile was driven by the accumulation of domestic debt as the DMO turned to the domestic debt market to fill the gap. gap in the financing of the FG deficit.

As a result, the share of external debt fell to 38.8% in the second quarter of the year from 39.9% in the first quarter, while the share of domestic debt increased by an equal magnitude, from from 60.1% to 61.2%.

While the government still plans to take on more debt to fund its obligations, analysts say the path the country is taking is unsustainable as the revenues withheld are no longer sufficient to service the debt.

Finance, Budget and National Planning Minister Zainab Ahmed sounded the alarm when she revealed that the cost of servicing the country’s debt in the first four months of the year was of 1.94 trillion naira, which is 310 billion naira more than the actual income received. during the period.

According to her, the federal government’s undistributed revenue for the period was only 1.63 trillion naira, 49% of the prorated target of 3.32 trillion naira. This means that the government has devoted 118% of its revenue to servicing its debt.

Analysts at Afrinvest West Africa, in an emailed note commenting on the country’s debt status, said: “Our assessment of debt sustainability measures suggests that the debt-to-GDP ratio has reached 23.7 % in Q2:2022, which is below both DMOs, 40 percent and the IMF thresholds of 55 percent of GDP).

“Given that tax revenues are moving well below 5% of GDP, we have focused on other key sustainability indicators. The debt to revenue ratio increased further to 11.9x in Q2:2022 from 8.9x in Q1:2022, indicating the colossal size of Nigeria’s debt relative to FG’s annual revenue. Based on available debt service and retained revenue data from FG in the first quarter of 2022, the annualized debt service to revenue ratio for 2022 is 138% compared to 96% in 2021, which translates to deployment of all FG revenues and partial use of new debt to offset interest payments on loans.

“In our view, the current fiscal policy trajectory is unsustainable, especially with the inefficient budget structure that prioritizes recurrent spending over capital spending due to the high debt burden and the cost of governance. In addition, the FG’s weak revenue-generating capacity encouraged the use of outstanding debt to fill budget gaps.

The amount spent on servicing external borrowings has been on the rise since 2015, from $331.059 million spent in 2015 to $2.019 billion in 2021. In the first half of this year, the government has already spent $1.291 trillion to ensure the service of its external loans. .”

Also commenting on Nigeria’s debt situation, analysts at Cowry Assets Management note that “Nigeria’s inability to rein in its unwanted accumulation of public debt and fiscal sustainability risks keep it clinging to a fiscal cliff as the The weakening of the local currency against the greenback and the weakness or absence of benefits from the recovery of crude oil caused by the impasse in Northern Europe, continue to hamper its ability to service its debts.

“It comes in the face of shortage of funds; and to be honest, no respite for FG’s debt levels as the borrowing spree trend continues under the partial funding of over N5 trillion naira deficit in the Appropriations Act 2022 as well as a new round of borrowing by state governments and the FCT as we enter an election year.

Stating that the government needs a revamped fiscal rule that would not jeopardize the sustainability of its public finances, analysts at Cowry Assets believe that “building up larger fiscal buffers will help avoid a debt crisis that could have destabilizing effects on the overall sustainable growth of the economy”. .

“Meanwhile, a downside is the debt service to revenue ratio which has remained relentlessly high in the face of FG’s low revenue generating power over the years. Of course, FG will continue to implement initiatives aimed at generating revenue from oil and non-oil sources respectively.

“However, it is imperative to state that blocking revenue leakage, promoting effective growth-oriented reforms and frameworks, and then overhauling weak institutions to help improve those reforms, are sacrosanct for obtain an effect and a sustainable management of the public debt”.

Similarly, Afrinvest analysts said, “to avoid worsening the fiscal crisis, we recommend the implementation of prudent fiscal frameworks to limit wasteful spending as the FG stems the tide of large-scale oil theft. scale and declining production due to poor oil infrastructure, vandalism, and low oil investment flows.

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