With the amount spent on debt servicing in the first four months of 2022 outweighing the revenue of the country, analysts have projected that the Central Bank of Nigeria (CBN) financing of government through ways and means would hit N23.2 trillion by end of the year.
This is as BudgIT, a civic-tech organisation leading advocacy for transparency and accountability in Nigeria’s public financial management, has expressed concerns over the poor fiscal performance of the federal government’s 2022 budget and the growing subsidy payments.
Last week, the Ministry of Finance released the fiscal performance report of January to April 2022 during the recently concluded public presentation on the 2023-2025 Medium Term Expenditure Framework (MTEF).
According to the performance report, the Federal Government’s aggregate revenue for the four-month period settled at N1.63 trillion underperforming the prorated target of N3.23 trillion by 50.9 per cent.
The report also showed that the amount the Federal Government spent on servicing its debts rose by 47 per cent to N1.94 trillion as against N1.32 it had envisaged for the period. This puts the debt service-to-revenue ratio at 119 per cent, indicating that revenue generation can no longer cover debt service obligations.
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Overall, the fiscal deficit printed NGN3.09 trillion and analysts project that at this run rate, the fiscal deficit would settle at an estimated N9.27 trillion by the end of the year.
Commenting on the debt service to revenue of the government, Senior Macroeconomic Strategist at Cordros Capital, Abdulazeel Kuranga noted that the higher debt service compared to revenue also implies that the FGN is borrowing to service parts of its debt.
Consequently, it suggests that all non-debt and capital expenditure of the government now come from borrowed funds.
The delicate situation the FGN has found itself implies higher borrowing from domestic and foreign sources in future periods. However, we maintain that it is unlikely that the FGN will access the external market to issue Eurobonds, given the current level of yields.
Instead, we expect borrowings will be channelled to the domestic debt market through FGN bond sales and Treasury Bills overallotments, primarily, while the synergy between the CBN and fiscal authorities implies continued and increased usage of the Ways & Means balance.
Accordingly, we envisage increased domestic borrowing and reliance on the CBN’s Ways & Means (W&M) as external borrowing conditions are presently unfavourable. Indeed, the actual W&M in six month of 2022 was N2.45 trillion, according to the CBN.
Analysts at Agusto&Co had earlier noted that government borrowing from the CBN is expected to rise further to N23.2 trillion, pushing the Federal Government’s local currency debt to circa N46 trillion by the end of this year, thus limiting the supply of debt securities.
Kuranga noted that as global monetary tightening means increased debt service costs on foreign debt, the government may look towards increasing its local borrowings alongside the W&M from the CBN.
Higher foreign borrowing implies higher interest rates on the debt over the medium term. However, it could lead to a point whereby higher rates will not be enough to appease foreign investors.
demand further devaluation of the local currency, leading to unabating pressure on the local currency.In addition, higher foreign borrowing also increases the risks to Nigeria’s future debt repayments, with the loans susceptible to interest and exchange rate risks. The significant implication of the increased domestic borrowing is that the medium-term expectation for yields in the fixed income market would remain biased to the upside.
It would be recalled that the International Monetary Fund (IMF) had warned that the country might be spending all its revenue on servicing debt in the next four years if the rising debt level is not cautioned.
According to BudgIT, the most pressing concern is the debt service-to-revenue ratio, which has reached alarming levels within the first four months of 2022.
The Federal Government revealed last week that the country’s current debt service, which stood at N1.94 trillion from January – April 2022, is over 100 per cent of the nation’s revenue which was N1.64 trillion, within the same period.
This is in spite of warnings given by the International Monetary Fund (IMF) that Nigeria would be spending over 100% of its revenue on debt service in 2026. Unfortunately, those predictions are Nigeria’s current realities.
