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Nigeria’s Debt Servicing Soars as Inflation Takes Its Toll on Economy

July 18, 2023
  • Central Bank of Nigeria’s Overdraft Reaches N1.2 Trillion as Revenue Falls Short
  • Revenue performance remains below 70% of target
  • Nigeria’s fiscal deficit exceeds N25.5 trillion in less than eight years
  • Maturing debt fund account goes unallocated for nine months
  • Inflation rises to 22.79%, prompting skepticism among economists and calls for integrity test on NBS data

New data reveals the dire fiscal situation Nigeria faces in the 2022 financial year, as a staggering N4.23 trillion out of a total revenue of N4.26 trillion went towards debt financing. This puts the country’s debt service to revenue ratio at a record high of 99.2%, nearly 10 percentage points higher than the estimate of 80.6% in the 2023 budget. The figures indicate that Nigeria’s debt problem is worsening, with warnings from the World Bank that the debt service cost could reach 160% by 2027 if radical reforms are not implemented.

Out of the debt service cost for the first three quarters, approximately 28% or N1.2 trillion was allocated to the controversial ways and means (W&M) facilities provided by the Central Bank of Nigeria (CBN). Domestic debt accounted for N2.15 trillion, while N871 billion was allocated to foreign debt servicing during the nine-month period. The actual cost of debt service was 41.9% higher than the pro-rated estimate in the approved budget of N2.98 trillion.

While Nigeria continues to borrow heavily, accumulating N3.41 trillion in fresh debt liabilities, 85% of the new loans or N2.9 trillion came from the local debt market. This trend highlights the growing preference for the local market due to the restrictive monetary regime and the higher interest rates in the international market. Experts warn that this increased reliance on borrowing from the local market could crowd out private sector investments needed for economic growth and job creation.

Revenue performance for the period was only around 70% of the target, with N4.25 trillion realized out of the prorated estimate of N6.18 trillion. Capital projects received limited attention, with total spending amounting to N1.68 trillion, approximately 38% less than the budgeted amount of N2.7 trillion. Meanwhile, recurrent expenditure fell short of the estimated N4.53 trillion, with actual spending at 17% below target.

The fiscal deficit for the first three quarters stood at N2.6 trillion, adding to the total fiscal deficit accumulated under President Muhammadu Buhari’s administration, which now stands at N25.5 trillion. The challenging fiscal situation can be attributed to the decline in crude oil prices and the impact of the Russia-Ukraine war, as well as policy inconsistencies and a lack of focus on production and investment.

Despite the removal of fuel subsidies and significant price hikes, Nigeria’s headline inflation rate for June stood at 22.79%, higher than the 22.4% recorded in May. Economists express doubt about the accuracy of the inflation figures, as the increase in fuel prices and transportation costs should have had a more substantial impact on consumer prices. The National Bureau of Statistics (NBS) attributes the discrepancy to data collection limitations and suggests that the full effects of the policy changes may be reflected in subsequent months.

To tackle inflation and stimulate the economy, experts emphasize the need for increased production, investment in the energy sector, and efforts to enhance security for farmers. They also suggest expediting the start of production at the Dangote refinery to reduce fuel imports and save foreign exchange. Without addressing these fundamental issues, Nigeria’s economic challenges are likely to persist.

Source: The Guardian

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