Why Fed Govt can’t add N24tr loan to national debt
Explanations came at the weekend from the Debt Management Office (DMO) on why the Federal government’s outstanding overdraft of about N24 trillion has not been added to the national debt stock
The DMO said the needed approval for the conversion of the facility, taken from the Central Bank of Nigeria (CBN), has not been given.
The borrowings, totaling N23.8 trillion, otherwise known as Ways and Means, were overdraft (or advance bridging credits) extended by the apex bank to help the federal government met its financial exigencies.
The DMO, which oversees government’s debt issuances and management, said the conversion of the apex bank’s overdraft to the formal national debt stock was delayed because the agency has not received necessary approvals.
Its Director-General Ms. Patience Oniha, said the N23.8 trillion Ways and Means would be added to the formal national debt stock once all necessary approvals have been secured.
She allayed fears that such conversion, otherwise known as securitization, would have any negative effects on the financial markets, noting that the conversion would have no crowding out effect on the financial markets.
Analysts however expressed concerns at the weekend that the conversion of the Ways and Means could trip the delicate debt sustainability of the country, worsening the country’s global credit risk profile. Global credit rating agencies had recently downgraded Nigeria’s sovereign ratings.
Analysts at Afrinvest (West Africa) at the weekend noted that the addition of the N23.8 trillion would balloon the nation’s public debt stock from N44.1 trillion by the end of September 2022 to N67.8 trillion.
They pointed out that while the country appears to be within its debt sustainability range, the addition of the Way and Means could worsen the debt situation.
One of the analysts said: “Assessing the new debt milestone in light of key sustainability metrics set by the DMO – the debt mix, debt as a percentage of GDP, and deficit as a percentage of GDP – we submit that Nigeria’s debt sustainability strategy is hanging by a thin line.
“In terms of the debt mix, excluding Ways and Means, we observed that the share of external debt increased in third quarter2022 by 10 basis points to 38.9 per cent due to fresh external borrowings of N535.0 billion, while the share of domestic borrowing fell 12 basis points to 61.1 per cent despite fresh borrowings of N690.0 billion.
“However, by adding Ways and Means liability to the debt stock, the external debt share fell to 25.3 per cent, implying that the domestic debt component has breached the sustainable cap of 70.0 per cent by 4.7 percentage points.”
Analysts noted that with the third quarter 2022 standing, in view if nominal GDP of N144.6 trillion, Nigeria’s debt as a percentage of GDP is estimated to reach 35.2 per cent by end of 2022 in a blue-sky scenario as against 32.6 per cent in 2021– a close shot from DMO’s sustainable mark of 40.0 per cent.
But in a base case scenario, deficit to GDP rate could settle around 3.7 per cent by year-end as against 4.2 per cent in 2021, implying a sustained breach of the 3.0 per cent cap stipulated in the 2007 Fiscal Responsibility Act.
Analysts described as worrisome the debt-service-to-revenue ratio-a measure of liquidity, which remained disproportionately high at 83.0 per cent as of third quarter 2022, noting that based on estimate, the debt service-to-revenue ratio could touch 91.8 per cent by the end of this year, almost on the level of 96.3 per cent projected by the World Bank.
“In our view, the outgoing administration is less likely to implement any fiscal reform that could remedy the deteriorating debt sustainability situation in its remaining few months. Hence, we posit that budgetary reform, fiscal prudence, and revenue innovation would be key if the next administration would rescue the weakening debt sustainability trend,” analysts stated.
