Nigeria Fiscal Situation Signaling A Debt Crisis

Nigeria’s plan to raise a $2.86 billion Eurobond and simultaneously raise minimum wage could lead to a significant deterioration in the country’s financial position unless it is able to raise revenues.

The new external borrowing will take the country’s total external debt stock to $24.9 billion from the current $22.16 billion, 6 percent of the GDP of Africa’s largest economy.

The proceeds are expected to fund the country’s N9.1 trillion ($29.8 billion) budget, which has a deficit of N2.4 trillion and could even widen if ambitious revenue targets set out in the budget are not achieved, as has been the case for the past three years.

“On President Buhari’s new bond request, going forward, we do not believe that Nigeria should enter into any loan agreements without conditions for fiscal discipline attached, not with an N22.3 trillion debt profile as at 30 June,” Lagos-based economic intelligence firm, SBM intelligence said in a tweet Friday.

“Nigeria is now in a precarious situation where it is inevitable that it will be forced to make the hard decisions of cutting costs that it is shying away from. Government revenues can no longer pay all wages, not to talk of executing much-needed infrastructure projects,” SBM analysts said.

In 2017, the budget implementation report of the Federal Government shows that it only realized actual revenues of N2.7 trillion, which was about half its projected revenues for the year and 36 percent or one-third of its projected expenditure of N7.44 trillion.

Faced with the sharp revenue shortfall, the Federal Government spent almost 1 trillion less than it planned to spend in 2017 but the final N6.5 trillion spent was still N3.8 trillion more than its total revenues for the year and had to borrow N2.5 trillion to help fund its financial obligations for the year.

The government in 2017, borrowed N1.2 trillion from the international capital markets and borrowed the balance of N1.3 trillion from the domestic capital markets. However, it left another N1.3 trillion of the total deficit unfunded in 2017.

President Muhammadu Buhari on Tuesday sent a new request to the National Assembly seeking to raise $2.8 billion Eurobond, Nigeria’s fifth in the last two years, despite concerns that debt service to revenue ratios is already hitting unsustainable levels.

While the country’s low debt to GDP ratio suggests there is still room for more borrowing, it is its debt service as a percentage of revenue that has drawn widespread concerns.

In 2017, Nigeria’s debt service to revenue ratio ballooned to a record high of 69 percent that implies that for every naira earned, the country spends 69 kobos servicing debt, leaving just 31 kobos to spend on infrastructure or educate its rising population. The new US$2.8 billion borrowing, which is expected to come at a higher yield than previous borrowings, will put further pressure on the already high debt service to revenue ratio.

The yield on the Eurobond issued in February 2018 has climbed to 8.5 percent (as of October 11) from 7.625 percent at issuance, which hints at what it may cost to raise fresh debt.

In the second quarter of 2018, Nigeria spent a total of $202 million servicing debt raised from a mix of multilateral borrowers and private investors, according to DMO data.

That takes the amount spent servicing external debt this year to $427 million, having spent $225 million in the first quarter.

Forecasting with the half-year trend, external debt service payments could hit $854 million by year-end, 84 percent higher than the $464 million spent in 2017.

The estimated debt service costs for 2018 is 19 percent of the Federal Government’s oil earnings in 2017.

The second-quarter debt service cost of $202 million represents a 248 percent increase from the comparable period of 2017 when $58 million was spent servicing foreign debt. The amount is $109 million shy of the $331 million spent servicing external debt in the whole of 2015.

Commercial bonds soaked up the largest chunk of the payment in Q2 2018, with 56.5 percent, while multilateral loans and bilateral loans accounted for 25 percent and 7.9 percent respectively. Agency fees and oil warrant accounted for 10.3 percent.

This has dire implications for an economy still suffering from the effects of a painful recession in 2016.

The Federal Government earned N2.7 trillion in oil and non-oil revenue in 2017, the lowest since 2011 when the government earned N2.56 trillion. That implies revenue to GDP ratio of 2.3 percent, the lowest in at least a decade.

Already, the Federal Government’s total non-debt recurrent expenditure of N2.8 trillion in 2017 was more than its total 2017 revenue.

An exit from recession in 2017 and higher petrodollars have failed to translate to improved earnings for the government, as revenue earned in 2017 is a 9.6 percent decline from the N2.939 trillion earned in 2016.

Despite the obvious acute revenue challenge, the government has engaged in advanced discussions with labor unions to raise the monthly minimum wage of N18, 000 ($USD 58), and has already proposed a 33 percent hike to N24, 000 while the Nigerian Labor Congress, an advocacy group for government workers, is pushing for a 67 percent increase to N30, 000.

Three Possible Scenarios

If the Federal Government gets its way, that would push its wage bill by N615 billion from N1.866 trillion in 2017 to N2.4 trillion, 90 percent of the government’s total revenues in 2017.

If the NLC succeeds, then personnel costs will rise by N1.25 trillion, taking personnel costs to N3.1 trillion, 14 percent higher than the government’s 2017 revenue and 34 percent of the 2018 budget.

That could leave the government no choice but to borrow, just to meet personnel expenses, without adding statutory transfers, overhead costs, debt service, and capital expenditure.

If both parties meet each other halfway, then they could settle at N27, 000, a 50 percent increase from the current minimum wage. That then implies a wage bill of N2.7 trillion, the equivalent of the government’s 2017 total revenues.

“This is not just a minimum wage hike,” said Andrew Alli, former CEO of the Africa Finance Corporation and now a director at the private-equity firm CDC Group.

“After it is done there will be agitation that differentials will need to be maintained, meaning that virtually all government employees will have a pay rise. This is part of our habit of not adjusting things continuously meaning that we then have to adjust through economy-crushing massive hikes (think exchange rates, fuel prices, government salaries), to name but a few,” Alli said in a tweet response to Business Day Nigeria.

Already, the International Monetary Fund (IMF) has warned the country about the unsustainability of its rising foreign debt stock, which has failed to translate to economic growth.

The Federal Government’s domestic and external debt (excluding states) is up 73 percent to N18.9 trillion as of June 2018 from N10.9 trillion in 2015, according to the Debt Management Office (DMO).

In the same period, GDP growth has declined from 2.5 percent in 2015 to 1.5 percent in the second quarter of 2018 with expectations for 1.9 percent full-year growth.

But Udoma Udo Udoma, minister for budget and national planning, speaking at the IMF meetings in Indonesia last week, dismissed claims made by the IMF of a possible debt crisis. He, however, admitted more needed to be done to boost revenues.

Ayo Teriba, one of the country’s leading economists, also lent his weight to warnings that the country is headed in the wrong direction by amassing expensive debt when there are alternatives that won’t cost as much.

“The shortfall in government revenue is a fall in income if the fall is temporary, then you can borrow but you can’t solve a lingering revenue slide with short-term debt,” Teriba said.

“We need fresh sources of income, the government wants to boost tax receipts to make up for the revenue shortfall, but that is a mirage because the private sector is also hit by weak economic activity.

“This is the time to raise equity, not debt and we can learn from countries like Saudi Arabia which plans to raise about $200 billion by privatizing about 16 sectors of its economy. Ethiopia is doing the same,” Teriba added.

So far, the government has been lukewarm to privatization. The country’s privatization agency had said it would raise N289 billion ($797 million) selling 10 state-owned assets to bridge an appalling revenue shortfall and meet up with key projects in its budget. But it hasn’t happened as the government has clearly shown a preference for debt over equity.

Between 2016 and 2017, the Federal Government borrowed N3.2 trillion, according to a budget implementation report published on the website of the National Budget Office.

In those two years, the government raised N5 billion ($16 million) in privatization proceeds, 14 times less than it made from selling only one company in 2006, following the $225 million sale of Port-Harcourt based olefins and polyolefin’s maker, Eleme Petrochemical to Indorama Group.

Though provision was made for N10 billion (USD$ 32 million) in privatization proceeds in the 2017 budget, not a kobo was raised, an indication that the government does not really look at privatization as a good option to boost revenues.

To drive debt service to revenue ratio below a more accommodating 50 percent based on 2017 debt levels, the government would have to almost double revenues.

This means raising an additional N2.7 trillion in revenues while ensuring that debt levels do not spike further.

Achieving this, for now, looks like a steep call, unless the government moves to take some difficult economic decisions to cut down expenditure through ‘unpopular’ economic reforms that will include labor cuts and privatization of key assets and introduce an appropriate pricing mechanism for petrol and power.