Debt Report: Pandemic-induced Fiscal Deficit and Currency Devaluation Fuels Higher Debt Burden

Debt Report: Pandemic-induced Fiscal Deficit and Currency Devaluation Fuels Higher Debt Burden

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The Q4:2020 debt report as recently published by the Debt Management Office (DMO) and the Nigerian Bureau of Statistics (NBS) reveals a 20.1% rise in Nigeria’s public debt stock to ₦32.9tn and a 23.4% increase in FG’s debt burden to ₦26.9tn as at 2020 year-end. The current debt amount implies a Debt-to-GDP ratio of 21.6% for 2020 (2019: 18.8%), using FY:2020 nominal GDP figure. The expansion in debt reflects the devaluation in the domestic currency by 19.3% from ₦306.00/$1.00 to ₦379.00/$1.00 at the CBN official window by the end of 2020. In addition, increased borrowing during the year as the Federal Government obtained multilateral financing from the IMF ($3.5bn), World Bank ($1.4bn) and AfDB ($307.1bn) to plug the pandemic-induced fiscal deficit also fueled the rise in debt. Hence, external debt burden for both FG and States surged 40.8% to ₦12.7tn ($33.3bn) and the external debt for FG alone spiked 44.5% to ₦10.9tn ($28.5bn). The FG also increased domestic borrowing by 12.3% y/y to ₦16.0tn, leveraging the low-yield environment as borrowings via bonds, promissory notes and Sukuk bonds increased by 12.4%, 32.6% and 81.3% y/y respectively in 2020.

Although debt-to-GDP remains below the threshold advised by the IMF, debt-servicing costs paints a different picture, especially when compared with the weak level of government revenue. Debt-service costs rose by 15.4% to ₦2.4tn and debt service-to-revenue worsened to 62.2% from 50.7% in 2019. External debt-servicing costs rose by 16.7% to $1.6bn due to increase in multi-lateral and bi-lateral financing. The weakness in the domestic currency however drove a faster rise of 36.4% to ₦592.9bn in Naira terms. Domestic debt-servicing costs also increased 10.0% y/y to ₦1.9tn from ₦1.7tn reported in 2019.

In terms of debt composition, external debt represented 40.5% of total FG’s debt in 2020, above FG’s target of 40.0% as external debt rose faster due to the aforementioned factors. Looking ahead, we do not expect increased significant external borrowings in 2021 as the FG’s target for debt composition has been changed to 70:30 in the 2020-2023 MTEF, estimated service costs of existing Eurobonds in 2021 totaling about $806.3m and still-low yields in the domestic bonds market. We expect the FG to continue feasting on the low-yield environment to bridge its financing gap in 2021 in order to align with the new debt mix target. We anticipate debt service-to-revenue to remain worse due to low revenue collection and currency weaknesses.

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