External debt servicing rises to $2.78bn — CBN report

Nigeria’s debt servicing in the first seven months of this year rose by 53.63 per cent, or $971.47m, to $2.78bn, up from the $1.81bn recorded in the same period in 2023.

This was disclosed in the Weekly International Payments data available on the Central Bank of Nigeria’s website.

CBN data showed that external debt servicing had gulped the highest amount in May at $854.36m followed by $560.51m in January and $542m in July.

Debt servicing in the other months of February, March, and April had stayed below $300m with the lowest amount paid in June 2024 at $50.82m.

In the previous year, the highest amount paid on external debt servicing was $641.69m in July 2023, followed by $400.47m in March 2023. Other months stayed below the $300m threshold with the lowest being $54.35m in June 2023; a pattern of lower payment which was repeated this year.

Debt servicing is a significant portion of the weekly international payments made by the Central Bank of Nigeria.

According to the Debt Management Office, Nigeria’s debt stood at N121.67tn as of the end of the first quarter.

The DMO report read, “Nigeria’s total public debt stood at N121.67tn ($91.46bn) as of March 31, 2024. The comparative figure for December 31, 2023, was N97.34tn ($108.23bn). Total domestic debt was N65.65tn ($46.29bn), while total external debt was N56.02tn ($42.12bn).”

Providing details about the increase in the public debt, DMO said, “The increase in naira terms of N24.33tn is being misinterpreted as new borrowing. The amount represents new borrowing of N2.81tn as part of the new domestic borrowing of N6.06tn provided in the 2024 Appropriation Act, new domestic borrowing of N4.90tn as part of the securitisation of the N7.3tn Ways and Means Advances approved by the National Assembly, as well as, the depreciation in the official naira exchange rate from $/899.39 in Q4, 2023, to $/N1,330.26 in Q1, 2024.”

On the increase in debt servicing, the Director of Research and Strategy at Chapel Hill Denham, Tajudeen Ibrahim, aligned with the stance of the DMO that the devaluation of the naira played a part in the increase in Nigeria’s debt and mentioned that there was one other driver.

“One, there is a foreign currency translation impact on the debt servicing, and the second factor is the actual increase in the debt value itself because, in the period that you are looking at, Nigeria has taken on more debt both internationally and locally. Nevertheless, there is some element of currency devaluation in the figure that you are looking at,” he said.

Other market watchers have warned that Nigeria risked being in a debt trap if it continues to take on more loans at a higher rate.

With a low credit rating, Nigeria is unable to access cheaper funding hence debt servicing would continue to increase impacting recurrent or capital expenditures.

The alternative that the experts have proffered is to either stop borrowing or borrow for capital expenditure rather than consumption.

In May, international rating agency, Fitch Ratings revised Nigeria’s outlook on Nigeria’s Long-Term Foreign-Currency Issuer Default Rating to positive from stable, affirmed the IDR at ‘B-’ and also projected that debt servicing will hit $4.8bn in 2024.

“Government external debt service is moderate, expected at $4.8bn in 2024 and $5.2bn in 2025 (with $2.9bn of amortisations, including a $1.1bn Eurobond repayment due in November). The government plans to meet its external financing obligations through a combination of multilateral lending, syndicated loans, and potentially from commercial borrowing,” Fitch said in its commentary.

This was despite insistence by the current administration to focus more on domestic borrowings from the capital market. It also estimated that approximately 30 per cent of Nigeria’s external reserves are constituted by foreign exchange bank swaps.

In 2023, the FGN’s external debt service payments increased by $1.1bn to $3.5bn in FY2023, comprising US$1.9bn and $1.6bn in market and non-market debt payments, respectively.

FG also projected a spending of N8.25tn to service its debt in 2024.

President Bola Tinubu stated that his administration is committed to stopping the vicious cycle of overreliance on borrowing for public spending and the resulting stress on the management of scarce government resources caused by debt service.

At the subnational level, 22 states have spent a total sum of N251.79bn to service debt borrowed by past administrations within nine months of assuming office,  a Sunday PUNCH report in July indicated.

Our correspondent also gathered that the states obtained fresh loans of N310.99bn between July 2023 and March 2024, despite increased monetary allocations from the Federation account.

The information was obtained from the budget implementation reports of each state sourced from the Open Nigerian States, a budgIT-backed website that serves as a repository of government budget data. BudgIT is a Nigerian civic organisation promoting transparency.

Meanwhile, in August, Nigeria debuted a $500m domestic FGN US dollar bond under its $2bn programme.

At the hybrid roadshow held in Lagos to launch the offering, it was revealed that the bond offering is targeted at pension funds, banks, as well as Nigerians living in the country, foreigners living in the country, and Nigerians living in the diaspora.

Analysts, who spoke with The PUNCH, projected that the offering would boost the external reserves to help stabilise the Nigerian currency.

A Professor of Capital Market at Nasarawa State University, Uche Uwaleke, observed in a commentary sent to our correspondent that bond issuance holds a lot of promise to investors and the economy in general in several ways.

Highlighting the potential, Uwaleke, who is also the President of Capital Market Academics of Nigeria, said, “It provides an opportunity to earn a risk-free return on investments given that dollar deposits with banks attract little or no interest, the interest payable to bondholders is exempt from income tax, and it allows retail and institutional investors to diversify their portfolios.

“It provides an alternative, cheaper source to meet the government’s financing needs in a period where the cost of servicing domestic debt is made more expensive by hawkish monetary policy. It should help to strengthen the naira since the dollars raised will be available for intervention in the forex market.”

He added that high demand for the debut bond would embolden the government to further explore the domestic dollar bond market, thus reducing its participation in the naira bond market, a development that would free up capital for the private sector.

However, an economist, Marcel Okeke, warned of the danger of dollarisation of the economy, saying,  “There is the danger of dollarisation of the Nigerian economy – especially in this case of a dollar-denominated local bond.”

Okeke, a former Chief Economist of Zenith Bank Plc, added, “Overtly or covertly, therefore, the ongoing issuance of domestic dollar-denominated bonds is outright dollarisation of the economy. Period!

“Section 15 of the CBN Act 2007 states that, ‘The unit of currency in Nigeria shall be the Naira which shall be divided into one hundred kobo.” Section 20 (1) of the Act states that ‘The currency notes issued by the Bank shall be legal tender in Nigeria at their face value for the payment of any amount.’ The ongoing dollar-denominated bond sale in Nigeria, therefore, is an official dollarisation or the introduction of what the IMF calls a ‘bi-monetary’ system.

“The domestic dollar bond issuance and its implied entrenchment of a bi-monetary system by the Federal Government of Nigeria leaves the economy with a dicey outlook. This implicit dollarisation of the Nigerian economy portends a further weakening and relegation of the naira.”