Devaluation heightens debt-service burden

By Taofik Salako, Deputy Group Business Editor

The recent naira devaluation has heightened Nigeria’s debt-servicing burden with actual debt-servicing amount to exceed N3.3 trillion in 2021.

Economic and finance analysts at Afrinvest Securities at the weekend said Nigeria risks higher debt servicing burden; even as the country’s debts continue to rise

The Central Bank of Nigeria (CBN) recently devalued naira to N410 per dollar from N379.

According to analysts, although Nigeria’s total debt stock as a percentage of Gross Domestic Product (GDP) remains below the Debt Management Office’s (DMO) medium-term debt sustainability benchmark of 40 per cent of GDP and International Monetary Fund (IMF) threshold for low-income countries of 70 per cent of GDP, the major concern is the impact of the recent devaluation of the naira on the external debt service cost going forward.

“For instance, in 2020, the Federal Government’s budgeted amount for debt service was N3.0 trillion.However, the actual amount spent on debt service printed at N3.3 trillion, representing a 10.8 per cent 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 per cent naira devaluation from N306/$1 to N379/$1 in second half 2020 played a significant role in this rise, especially with regards to foreign debt,” A frinvest Securities stated.

Analysts noted that with the 8.2 per cent  devaluation of the naira to N410 per dollar, the actual debt service amount for the year will likely exceed the approved N3.3 trillion by a minimum of 1.3 per cent.

“In addition, we expect Nigeria’s debt service-to-revenue ratio to settle above 75.0 per cent in 2021, despite the recovery in crude oil prices-average $64.50bbl in 2021 as against $45.00/bbl in 2020, which will bolster the Federal Government’s revenue from N3.9 trillion in 2020 to N4.4 trillion 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,” Analysts said.

The first quarter 2021 public debt stock report published by the National Bureau of Statistics (NBS) last week showed 0.6 per cent increase in Nigeria’s total debt profile to N33.1 trillion in first quarter 2021 from N32.9 trillion as at end of 2020.

Afrinvest attributed the marginal increase in debts in first quarter to “to the late approval of the borrowing plan of N4.6 trillion, including domestic borrowings of N2.3 trillion and external borrowings of N2.3 trillion for 2021 by the National Assembly.

Nevertheless, the new debt increase brought Nigeria’s Debt-to-GDP ratio to 21.8 per cent, using the 2020 nominal GDP figure, from 21.6 per cent at the end of 2020.

Analysts estimated that the Debt-to-GDP will increase to 23.2 per cent by 2021 year-end despite the IMF’s GDP growth projection of 2.5 per cent for 2021, as the recent approval of the N4.6 trillion borrowing plans by the National Assembly implies that total debt stock will hit N37.5 trillion by year-end.