New Telegraph

2020 revised budget: The looming debt crisis

The coronavirus (COVID-19) pandemic has been nothing short of unfavourable to an already vulnerable Nigerian economy.

 

The nation’s dependence on oil, fragile infrastructure, low foreign and domestic investments, declining foreign reserves and debt crisis, has further worsened the expected economic consequence of the pandemic. It is also what is responsible for the recent revision of 2020’s budget.

 

Last Friday, President Muhammadu Buhari signed into law a revised budget for the year 2020 of N10.8 trillion. Following the restrictions in international trade due to pandemic- induced lockdowns in many parts of the world, weakened global oil demand, as well as the pronounced decline in oil prices, the budget had to be revised to reflect current realities.

 

The GDP was projected to grow at 2.93 per cent in 2020, but this has now been revised to -4.41 per cent. For the revised budget, the oil benchmark was reduced from $57 per barrel to $28, and crude production was reduced from 2.18 million to 1.7 million barrels per day.

 

Nigeria’s Minister of Finance, Zainab Ahmed revealed that the impact of these developments is 65 per cent decline in projected net 2020 government revenues from the oil and gas sector.

 

So far, Nigeria has been only able to meet 56 per cent of its target revenue from January to May as the global oil price crash affected government revenue due to the COVID-19 pandemic.

 

A budget deficit of N5.365 trillion is expected to be funded by domestic and foreign borrowing while direct revenue funding will cover N5.158 trillion.

 

The debt situation Data from the Debt Management Office (DMO) reveals that Nigeria’s total debt currently stands at N28.62 trillion. This is following the move by Fitch, in April, to downgrade Nigeria’s Long Term Foreign Currency Issuer Default Rating (IDR) to ‘B’ from ‘B+’ with a negative outlook.

 

Mahmoud Harb, a director at Fitch had explained that the debt to revenue ratio for Nigeria is set to deteriorate further to 538 per cent by the end of 2020, from 348 per cent that it was a year earlier before improving slightly next year.

 

While the Joint World Bank-IMF Debt Sustainability Framework for Low-Income Countries released in 2020, noted that a country’s debt service to revenue threshold should not exceed 23 per cent, Nigeria’s debt service to revenue ratio for the past five years has witnessed a relatively steady increase.

 

Analysis using data from CBN’s annual Statistical Bulletin reveals debt service-revenue ratio of 32.63 per cent in 2015, 56.83 per cent in 2017 and 43.62 per cent in 2019. For the first quarter of 2020, we witnessed a 99 per cent debt service to revenue ratio suggesting that almost all the revenue generated from both oil and non-oil sources was used to meet debt service obligations. While this is reflective of the decline in oil revenue for the period, it is also one sign of looming debt crisis. According to information contained in the recently approved revised budget, Nigeria spent N943.12 billion in debt service in the first quarter of the year and N1.2 trillion between January and May 2020. It also plans to spend N2.9 trillion on debt service in 2020 against a revenue of N5.3 trillion. This represents a 55 per cent debt service to revenue ratio. About N1 trillion was spent on debt service in the first 5 months of the year.

 

If we were to strive to attain a palatable benchmark debt service to revenue ratio of even 25 per cent, based on the projected debt service for 2020, the government will have to generate at least 11.6 trillion annually.

 

The highest revenue the Federal Government witnessed over the past five years since 2015 was 2019’s N4.8 trillion.

 

Even though some of the debts come with very little interest rates like the $3.4 billion loan under the Rapid Financing Instrument (RFI) at just a 1 per cent rate of interest, the overall debt servicing burden is one that Nigeria may not be able to get itself out of especially since it cannot completely stop borrowing.

 

While COVID-19 has revealed our overdependence on the oil sector as well as the inefficiencies that have left us in the quagmire of increasing debt and reducing revenue from known sources, the biggest slap comes from knowing that Nigeria as a nation has spent so much and achieved so little that it can bank on when the chips are down.

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