As Nigeria’s external reserves ebbed to $44.8 billion last Monday, from over $45 billion announced by the Central Bank Governor, Godwin Emefiele, the prior week, anxiety is now mounting over its trajectory as debt service-to-revenue ratio, outlined in the 2019 Budget, is set to hit 70 per cent.
This is coming barely seven months after the Senior Resident Representative of International Monetary Fund (IMF) in Nigeria, Mr. Amine Mati, warned fiscal and monetary authorities that “debt servicing, which currently takes about 50 per cent of the country’s revenue, is certainly high.”
He then advised that it was high time the government addressed Nigeria’s debt service/revenue ratio!
But from the look of things, it seems that warning was not heeded as N2.144 trillion or over 24 per cent of the N8.916 trillion budgeted for this year is waiting to be gobbled up by debt servicing obligations.
This is 6.46 per cent higher than N2.013 trillion used to offset debt obligations in 2018. But in the face of government’s dwindling revenue streams, Senator Udoma Udo Udoma, the erstwhile Minister of Budget and National Planning, announced before vacating office last month that the 2019 budget has overall deficit of N1.859 trillion which was 1.33 per cent of Nigeria’s gross domestic output. He added that the projected deficit would be funded mainly by borrowing N1.649 trillion from domestic and foreign debt markets.
“The implication of the deficit portion is that it will push the debt service-to-revenue ratio from 66 percent to above 70 percent in 2019, which is like spending N70 out of every N100 earned by the Federal Government to service debt”, says New Fortunes, a publication of Finance Correspondents Association of Nigeria.
Mati in his warnings last year noted that interest payment had become a major challenge as “a lot more of the resources are going into paying interests and there is less to spend on capital expenditure.”
The IMF chief advised that massive revenue mobilisation remained the only way to address the challenge but noted that Nigeria, was not doing well enough in that regard.
According to him, the Nigerian authorities rather than mobilising more revenue, its current strategy has been to cut expenditure in an economy with a very poor rate of spending.
He said “adjustment has relied on spending compression rather than revenue mobilisation,” adding that the nation has huge revenue potential that remained untapped.
What debt service ratio means
Wikipedia, an online dictionary, says “a country’s debt service ratio , in economics and government finance, is the ratio of its debt service payments (principal + interest) to its export earnings. A country’s international finances are healthier when this ratio is low. The World Bank, in its International Debt Statistics, corroborating this definition, explains that “the sum of principal repayments and interest actually paid in currency, goods, or services on long-term debt, interest paid on short-term debt, and repayments (repurchases and charges) to the IMF’, which puts Nigeria total debt service at 6.30 as of 2016. Its highest value over the past 39 years was 38.04 in 1986, while its lowest value was 0.49 in 2013.”
With the impending 70 per cent debt servicing-to-revenue ratio, another enormous pressure awaits the nation’s foreign reserves because, “basically, external debts have to be settled in foreign currency. Therefore, the stock of reserves becomes a significant source of financing the external imbalances”, say Senibi et al in their research article: Public and External Reserves: The Nigerian Experience (1981-2013).
Meanwhile, Head of Research at Augusto & Co, Jimi Ogbobine, blamed Nigeria’s high debt servicing-to-revenue ratio on its very low tax base or government’s weak tax collection capacity.
“If you look at non-oil taxes, they are less than four per cent of the GDP. What that means is that we have a big GDP but we are able to extract taxes from just small portion of that GDP.” The second reason is that our budget structure is also weak. We allocate more to consumption, like recurrent expenditure rather than investment in capital expenditure (capex). When you invest more in capex, it increases the attractiveness, the competitiveness of your economy so that benefits can flow in better, you can address structural issues and some cases that arise in the economy,” he said.
On the growing concern over the fate of the reserves, he said the major task, beyond the reserves, will be on the fiscal side. “If you spend 60 per cent of your revenue on debt service, you will have only 40 percent left to finance both capital and recurrent expenditure. If you have a balanced budget, you will have 40 per cent left for overhead recurrent and other expenditures. But in the case of Nigeria we do not run a balanced budget when we have a budget deficit. By the time 40 per cent is gone into debt servicing, you know we have a new minimum wage. Even beyond the minimum wage, for the overhead and recurrent expenditure, what we have left for capital expenditure (capex) is mainly financed through borrowing. And what we also have left for human capital development for core sectors like education and health is impaired a la through borrowing for repayment cost. That is the implication.
Another use to which the external reserves is put is foreign exchange (forex) market intervention so as to guard against unforeseen volatility. This was enunciated recently by Emefiele, when he stated: “The CBN Act demands that we “defend” the Naira using the foreign exchange reserves.
In setting out the 5 principal mandates of the CBN, Section 2, Subsection C of the CBN Act 2007 reads and I quote “…maintain external reserves to safeguard the international value of the legal tender currency”.