Nigeria’s Eurobond sale weakens public finances as debt service swallows resources

The oversubscribed sale in September was originally intended to raise $3bn. The current debt level is “highly unsustainable” on World Bank indicators, and will remain so in the absence of policy change, says Lukman Oyelani, an economist at the University of Lagos.

Borrowing in foreign currency in the context of a depreciating naira increases the risks, Lukman says. “The debt profile of Nigeria is a big risk for the country.” The only lifeline is that the country has more domestic than foreign debt, he says. According to Chapel Hill Denham, external borrowings currently account for 38.7% of total public debt.

Data from the Debt Management Office shows that Nigeria’s total public debt dropped slightly by 0.76% to $86.57bn in the second quarter, compared to the first. Still, the debt increased – in naira terms – as the currency weakened, and analysts at Chapel Hill Denham predict that debt may increase to more than $90bn by December.

The World Bank, in its International Debt Statistics 2022 report this week, said Nigeria and Ghana were among countries that refused to participate in a temporary suspension of debt-service payments due to concerns about future access to debt and credit-rating downgrades.

Nigeria’s fiscal deficit is likely to be wider than the government projects, Lukman says.

• Almost all government revenue is currently being used for debt service, and if debts continue to rise, the government will soon need to borrow, simply to meet debt-service payments, he says.
• In the first five months of the year, 98% of revenue was used to service debts.
• “The problem is leadership who think they can borrow their way out of economic problems,” Lukman says.

Professional debt management

Most of the amount raised in the eurobond sale will be used to fund recurrent non-debt expenditure, with little left for capital expenditure, says Abdulazeez Kuranga, an economist at Cordros in Lagos.

• The deficit may worsen because oil revenue is not improving as low oil production is capping the gains from higher oil prices, Kuranga says.
• Debt service costs are also running ahead of budget projections, though domestic or non-oil revenue is improving in line with the opening up of the economy for business, he says.

Nigeria’s debts do not have long enough maturities to allow them to be invested in long-term productive projects, Lukman says, because they are based on politics rather than economics. The use of loans for political patronage means that some projects never even get completed. “Political considerations don’t pay back loans.”

• The tax system lacks transparency, and more people working in the informal economy need to be brought into the tax net, Oyelani says. “Improving revenue collection does not necessarily mean increasing tax.”
• Debt management needs to be managed by experts rather than […] political appointees, Lukman says.
• Currently, borrowing is managed by “cronies masquerading as professionals. The professionals are not allowed to do their jobs.”

Bottom line

Economists see Nigerian public finances as set to remain exposed for as long as political considerations trump professional debt management.