Public Debt: Recent Currency Devaluation to Heighten Debt-Service Burden

Public Debt: Recent Currency Devaluation to Heighten Debt-Service Burden

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The Q1:2021 Public Debt Stock report published by the NBS this week showed a minuscule 0.6% q/q increase in Nigeria’s total debt profile to ₦33.1tn from ₦32.9tn as at end of 2020. We attribute the slow increase in the debt figure in Q1:2021 to the late approval of the borrowing plan of ₦4.6tn (domestic ₦2.3tn; external ₦2.3tn) for 2021 by the National Assembly (NASS). Nevertheless, the new debt increase brings Nigeria’s Debt-to-GDP ratio to 21.8% (using the 2020 nominal GDP figure) from 21.6% at the end of 2020. We estimate that this ratio (Debt-to-GDP) will increase to 23.2% by year-end despite the IMF’s GDP growth projection of 2.5% (2021), as the recent approval of the ₦4.6tn borrowing plans by the NASS implies that total debt stock will hit ₦37.5tn by year-end.

Although Nigeria’s total debt stock as a percentage of GDP remains below the Debt Management Office (DMO) medium-term debt sustainability benchmark (40.0% of GDP) and IMF threshold for low-income countries (70.0% of GDP), our concern is the impact of the recent devaluation of the Naira (to ₦410.00/$1.00 from ₦379.00/$1.00) on the external debt service cost going forward. For instance, in 2020, the FG’s budgeted amount for debt service was ₦3.0tn. However, the actual amount spent on debt service printed at ₦3.3tn, representing a 10.8% increase over the amount budgeted. Although the reason for the increase in actual debt service figure was not provided by the Ministry of Finance, Budget and National Planning, we believe the 23.9% Naira devaluation from ₦306.00/$1.00 to ₦379.00/$1.00 in H2:2020 played a significant role in this rise, especially with regards to foreign debt.

Hence, with the recent 8.2% devaluation of the Naira to ₦410.00/$1.00, we expect the actual debt service amount for 2021 to exceed the approved ₦3.3tn by a minimum of 1.3%. In addition, we expect Nigeria’s debt service-to-revenue ratio to settle above 75.0% in 2021, despite the recovery in crude oil prices (average $64.50bbl in 2021 vs $45.00/bbl in 2020) which will bolster FG’s revenue from ₦3.9tn in 2020 to ₦4.4tn in 2021 based on our estimate. We expect the high debt service-to-revenue ratio to continue to limit the government’s ability to provide funding for critical spending.



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