In its most recent Article IV report, the International Monetary Fund (IMF) raised the possibility of a debt servicing nightmare for Nigeria over the next six years. The report suggested that domestic and external debt service costs could exceed 100% of revenues by 2022 in the context of an ‘interest rate shock.’

The fact that the IMF included this worst case in its economic forecasting raises crucial questions about the government’s borrowing strategy. And between the best and worst cases are several linked developments in the financial landscape that are constraining Abuja’s ambitious capital spending programme ahead of the presidential and state elections next February and March. Under the federal government’s current policies, inflation is set to increase in the second half of 2018. This is linked to an array of factors: persistent revenue shortfalls, meagre bank lending to Nigerian businesses, weak non-oil/ non-agriculture growth, and fuel subsidy costs. The IMF has not pushed up its 2.1% GDP growth estimate for 2018, a figure that remains well below the unadjusted 3.5% in the now-passed 2018 federal budget.

Recent Debt Management Office (DMO) figures – of first-quarter debt service costs for domestic debt exceeding ₦900 billion (US$2.489 billion) or 10% of the 2018 budget – represent a 40% increase on similar debt servicing in first-quarter 2017. Approximately 70% of this hefty figure was consumed by interest payments. The first-quarter statistics show an estimated debt service ratio of just under 80%, but the DMO is nevertheless moving forward on plans to borrow almost US$3 billion – excluding already issued eurobonds – to fund the 2018 budget. DMO data also show that yields on several of Nigeria’s international eurobonds are higher than at issuance, reflecting the reduced attractiveness of Nigerian foreign debt, and indeed rising yields on African eurobonds generally.

Rising state debt levels

The DMO’s latest debt summary indicates that domestic and foreign public debt of US$74.28 billion as of 31 March is largely a result of increasing domestic debt at the state level. As well, a portion of the February eurobond was designated to retire expensive domestic debt but at that time had not yet been deployed. At 2017 year-end, Lagos, Delta, Rivers, Akwa Ibom, and Osun – in declining order – accounted for one third of the approximately ₦3.5 trillion (US$9,677 million) of total domestic state debt. The DMO and federal government will be wary of increased state borrowing, especially given state bailouts that are fresh in memory.

DMO director-general Patience Oniha recently emphasised that state governments are no longer authorised to borrow from banks or engage in bond financing without specific federal approval, and that the DMO will not authorise borrowing that causes a state’s annual debt service costs to exceed 40% of its revenues over the previous 12 months.

The DMO maintains it has rejected borrowing plans from a number of states but that errant banks have extended loans in violation of due process.

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