Nigeria’s debt service to revenue racing towards 70%
Nigeria’s debt service to revenue has gone from 29 percent in 2014 to 62 percent as at June 2017 and there is still some way to go before year end, if the government sees through plans to raise a $5.5 billion Eurobond this year.
Moscow-based investment firm, Renaissance Capital expects Nigeria’s debt service to revenue to hit 70 percent by year-end. Estimates by the International Monetary Fund (IMF) are not far off.
“The $5.5 billion debt issuance implies external debt will increase to 5.3 percent of GDP at year-end 2017, versus 3.9 percent in June,” said Yvonne Mhango, Sub-Saharan Africa economist at Renaissance Capital.
“That implies a 10 percent increase in total public debt to 18 percent of GDP at year-end 2017, assuming no domestic borrowing in the second half of 2017. This would bring debt service/revenue to 70 percent at year-end 2017,” Mhango said in an Oct. 19 note to clients.
Nigeria’s ballooning debt servicing costs could further stifle public revenues which have taken a beating from lower oil prices and an economic downturn.
It could also eat into planned capital expenditure and stoke government borrowing, even as it casts a shadow on the feasibility of full implementation of the N7.4 trillion (USD$30 billion) 2017 budget, lined up to boost growth in Africa’s most populous nation, after a biting economic recession in 2016 that persisted until the second quarter of 2017. Thirty percent of the budget is projected to go into capital projects, from rail lines to roads and power.
“The government needs to focus on revenue reforms to boost non-oil revenue, although I don’t think increasing Value Added Tax is a viable option,” said Ayo Teriba, CEO of Lagos-based advisory firm, Economic Associates.
“Government should look at privatisation and optimise rent revenue. With the vast land the government owns, it should not be a net rent payer, as it is today,” Teriba said by phone.
The Federal Government has a revenue problem that private capital can fix, according to Taiwo Oyedele, partner and head of tax and regulatory services at consulting firm, Price Waterhouse Coopers (PWC).
“There is a lot of private capital waiting to be deployed, if we have the right policy environment,” Oyedele said. “Government cannot provide all the country’s infrastructural facilities and needs the private sector to help out.
“If government continues to stall in tapping private capital, then the debt service to revenue will continue to worsen and that will jack up the sovereign’s risk of default and stoke borrowing costs for both the government and private sector,” Oyedele said in a phone interview with BusinessDay.
The government’s total retained revenue totalled N1.004 trillion in the first six months of 2017, according to data compiled by BusinessDay and sourced from the Ministry of Budget and National Planning.
That represents a N1.53 trillion shortfall (60.5 percent off mark) as against the planned N2.5 trillion prorate estimate for the period.
The biggest slippages came from Independent Revenue-70 percent (N119 billion earned versus N403 billion projected), Company Income Tax-61 percent (N157 billion vs N403 billion) and FGN’s share of oil revenue-60.97 percent (N414 billion versus N1.06 trillion). Non-oil revenue flunked the budget target by 49.96 percent (N352 billion vs N705 billion).
Government revenue is likely to improve over the course of the year and that could help reduce the debt to revenue ratio, according to Pabina Yinkere, head of institutional business at Vetiva Capital.
“Oil production is slightly up and will receive a boost from the completion of repairs to the Nembe Creek Trunk Line (NCTL) which exports Bonny Light,” said Yinkere.
“The economy is also recovering and companies will become more profitable and pay higher taxes, which will also boost government revenue,” Yinkere added.
Aiteo, operator of the NCTL, said on Tuesday, that repairs to the pipeline had been completed.
In addition, Royal Dutch Shell’s subsidiary in Nigeria, SPDC, lifted force majeure on Bonny Light crude oil exports at noon local time (1100 GMT) on Thursday, a spokesman said.
Shell declared force majeure one month ago, following the shutdown of the Nembe Creek Trunk Line, one of the two main pipelines taking Bonny Light grade to the export terminal. Exports have been continuing via the Trans Niger Pipeline.
Nigeria’s economy, which vies with South-Africa’s, as the largest in Africa, emerged from recession in the second quarter, after five consecutive quarters of contraction since the first quarter of 2016.
The economy grew by 0.55 percent (year-on-year) in real terms in the second quarter of 2017 buoyed by a 1.64 percent and 0.45 percent growth for the oil and non-oil sectors.
The oil sector GDP rebounded to positive territory, while the non-oil sector performance, driven largely by the Agriculture (Crop Production), Finance & Insurance, Electricity, Gas, Steam and Air Conditioning Supply and Other Services, remain strong.
Brent crude was down 1.5 percent, to $57.26 per barrel on Thursday, according to Bloomberg data, halting four days of advances, after a closely-watched weekly tally of U.S. fuel inventories showed a bearish rise in gasoline and diesel supplies.
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