Nigeria: The intricacies of Moody’s credit rating downgrade

What is interesting to note is that since the CBN Act was amended in 2007 by the senate, establishing section 38 “Ways and Means’’, the Nigerian government has followed in the footsteps of other high-risk emerging market countries, such as Sri-Lanka, Venezuela, Lebanon, and Ghana, to illegally tap into central bank advances (especially considering that these monies are not backed by foreign reserves). Between 2007 and 2015, for example, two successive administrations borrowed a total of N869bn ($1.887bn). 

In sharp contrast, between 2015 and 2023, the current administration embarked on a violation of 5% of real revenues for the previous accounting year by up to 2,819%, increasing the total from N869bn to N24.5trn. The resulting currency devaluation and depreciation have sparked an exchange rate-induced inflation, which has reduced the per capita income by 49% over the last 8 years.

In the 2023 Appropriation Act, the budget office apportioned 5.5% of its budget total (18.4% of its sinking fund) to use in servicing the “Ways & Means’’ loans. This is also coming on the heels of the fact that the government intends to raise the equivalent of $20bn in fresh borrowings in contravention of sections 41 (1A) of the fiscal responsibility act of 2007 that says: “The government shall only borrow to fund capital expenditure or human development.”

Another recession?

The latest downgrade by Moody’s from B3 to Caa1, which is three steps to Junk and three steps above the lowest rating at ‘C’, is proof that the Nigerian government has not presented the international community with a ‘viable’ fiscal revenue path in its medium-term expenditure framework. 

Considering that Nigeria’s Country Risk Premium has risen to 16.2% from 9.9% within 24 months, which has ranked the country’s Credit Default Swap rate as the 8th highest in the world, it is increasingly evident that a rising risk-free rate (RFR) from higher bond yield spreads is leading to an inversion of the bond yield curve.

This is also because, with a population growing at 3% per annum and the United Nations Food Population Programme (UNFPA) predicting a rise to 390 million by 2040 (growing faster than the gross domestic product that was reported at 2.54%), there are increasing signs that the economy might be headed for another recession.

Here are the options the government has, considering that its revenue to gross domestic product ratio sits at 7.4% for both tax and non-tax revenues:

• The government needs to bring in new managers and conduct a full business process re-engineering NNPC, so it can run as a private company that would find the most viable path for discovery and book-building to IPO on an international stock exchange (similar in some ways to what Saudi Aramco did in 2019).
• Generating external revenues for CAPEX. A landmark Supreme Court judgement, instigated by the Nigeria Governors’ Forum in 2011, stalled the FG from collapsing the Excess Crude Account (ECA) into the Sovereign Wealth Fund (SWF). It has not created savings and investments required for the development of Train 7 (that has the capacity to raise Nigeria’s LNG output from 22m to 30m metric tonnes, and bring in revenues of $3bn per annum), at a time when the stand-off in the Baltics, and an embargo on Russian Oil & Gas has led to spikes in the price of a ton of LNG to $150.
• The inclusion of a clause to raise the punitive damages (Corporate Income Tax from 30% to 50%) that international oil companies (operating 155 oil-fields) in Nigeria pay to flare gas (especially considering that the Associated Gas Re-injection Act gives them the permit to flare gas), in the 2022 finance bill has not only stalled the other amendments that are instrumental to raising revenue generation. It has shown the hypocrisy of the government; of the 9bn cubic feet of natural gas generated from well-heads, drilling 1.5m barrels of crude oil daily, the NLNG is only able to offtake 32% with its existing six trains. The refusal of the Nigerian government to keep its retained earnings in dividends and taxes, or provide external capital has stalled the development of new trains that are required to increase capacity utilisation and raise revenues from the Joint Venture of which Nigeria owns 49%.
• Petrol subsidy is a bottle-neck. The government has to accept the reality that not only is its daily total consumption of 66m litres of PMS false, the under-recovery for 66m litres that was only 29m litres in 2019, is not sustainable, and the realistic thing to do is to actually deregulate the markets like it did for diesel, seeing as a commercial refinery is due to begin production in Lagos in Q3 of 2023.
• Tariff & Duty Waivers are a drain. Given that the promissory notes issued to companies as export expansion grants (EEG) represent 2.7% of the total domestic debt stock, asking the Senate to amend the law (Industrial Incentives Act, Income Tax Relief Act, Export Incentives Miscellaneous Act) has become necessary.

In 2023, it’s important that the next Nigerian president begins to, beyond rhetoric, consider changing the principles of derivation and amend the legislatives lists (what is typically known as devolution of powers and fiscal restructuring), as a means to unlock the powers of the states to boost productivity. 

The solutions to the perennial problems of Nigeria are not rocket science. What has been typically lacking is the political will to implement them.