As the Federal Government is seeking the approval of the National Assembly to borrow about $30billion, the global financial ratings company, Moody’s Investors Service, has attributed its downgrade of the country’s rating to negative from stable as a result of the nation’s bloating debt profile.
According to the rating agency, the increasing fragility of Nigeria’s public finances is evident in the greater reliance by the government on financing from the Central Bank of Nigeria (CBN) over the last three years. It added that the government is dependent on oil export proceeds to cover persistently large fiscal deficits, with CBN cash advances reaching 2.5 per cent of gross domestic product (GDP) on a net basis at the end of September 2019.
Moody’s expects Nigeria’s debts to total N49trillion ($135billion) by the end of 2021, accounting for about 27 per cent of GDP. While still at moderate levels, debt has accumulated quickly over the last four years, almost tripling to an estimated N33trillion or 23.2per cent of GDP in 2019 from N12.6trillion or 13.2 per cent in 2015.
These figures includes the debts of the Federal Government, the states and local governments. They also include the net cash advances from the CBN, as well as the stock of promissory notes issued to clear past arrears.
Next year, the CBN is aiming to generate $4billion from non-oil exports revenue in 2020 but even if this is achieved, it pales in comparison to the $25billion got from crude oil shipments. Also, $4billion represents a minute percentage of Nigeria’s total GDP of about $375billion and with a tax-to-GDP ratio of just 6 per cent, the government is struggling to find ways of funding much-needed infrastructural projects.
A Moody’s spokesman said: “In particular, CBN advances are more expensive than debt-funded on the domestic capital market as the CBN applies a penalty rate on top of its monetary policy rate currently at 13.5 per cent. Moody’s expects general government revenues to remain very low at around 8 per cent of GDP until 2022, despite measures to such as the value added tax rate increase to 7.5 per cent from 5 per cent in 2020.
“Consequently, debt affordability will remain weak, with general government interest payments at around 25 per cent of revenues in the next few years. The economy has yet to fully recover from the oil price shock of 2015 and the subsequent recession in 2016, while real growth remains below population growth, denoting an erosion in incomes from already low levels.”
Moody’s also projected Nigeria’s real growth to remain weak, at just over 2 per cent over the next few years. It added that this low growth environment makes achieving the government’s objectives of job creation, improvement in social indicators and fiscal consolidation via increased revenue collection highly challenging.
“However, the continuation of the current policy mix, including the rationing of the supply of US dollars in the economy while suppressing part of the demand for foreign currency aimed at supporting domestic production and job creation over the long term, will constrain economic growth over the short to medium term. Overall, given Moody’s expectation that general government fiscal deficits are likely to remain around 4 per cent of GDP and 50 per cent of revenues and growth subdued over the coming years, rapid debt accumulation will continue,” the Moody’s spokesman added.
Commenting on the development, Mr Lukman Otunuga of FXTM, said the downgrade should act as another wakeup call for the nation to diversify and move away from oil
“Given how the negative outlook reflects Moody’s view of increasing risks to the government’s fiscal strength, this should act as another wakeup call for the nation to diversify and move away from oil reliance. Weak government finances exacerbated by depressed oil prices and sluggish economic growth may disrupt fiscal consolidation. With both monetary and fiscal policy needed to support the Nigerian economy, the mounting pressures from the fiscal side must not be overlooked.”