Nigeria is seizing on historically low domestic bond yields to keep debt payments costs as low as possible even as it piles on more borrowing and economists sound alarm over a future sovereign debt crisis.
Interest payments on the domestic debt fell marginally by 1.6 percent to N1.18 trillion in the first 8 months of 2020 (Jan – Aug), compared to a year ago, according to data compiled by MoneyCentral.
This comes as total domestic debt rose by N1.55 trillion or 11 percent between September 2019 and June 2020, according to Debt Management Office (DMO) data.
Domestic debts were equivalent to 63.35 percent of outstanding debt for the Federal Government, which had total debt of N31 trillion as at June 2020.
Bond Yields Drop
Benchmark 10-year bond yields due 2030 currently yield 6.31 percent down from double digits just a year ago. The yields which have fallen below similar South African 10-year securities equivalents – a key gauge of risk in the region – will knock billions of Naira’s off Nigeria’s debt financing bill this year, according to MoneyCentral calculations.
While Nigeria’s total public Debt to GDP remained at a ratio of 22.23 percent as at the end of June 2020, the low revenue collection as a percentage of GDP is a concern for economists.
“Revenues as a percentage of GDP are extremely low at about 6 percent,” said Ravi Bhatia, Director, Sovereign & IPF Ratings at S&P Global Ratings, which rates Nigerian debt at B- with a stable outlook.
“Less than 10 percent of corporates pay any taxes.”
The problem is compounded by the huge level of government borrowing now needed to fund the budget through 2023 amid the pandemic, revenue shortfalls and slumping growth.
Nigeria projects a budget deficit of N5.196 trillion for 2021 representing 3.64 percent of GDP which is to be financed equally from domestic borrowings of N2.14 trillion and foreign sources of N2.14 trillion.
Nigeria’s Federal Government recorded zero inflows from 10 of the 20 expected budget funding sources as at June 2020, according to MoneyCentral’s analysis of the Federal Governments latest budget data, a signal of the strain the oil producing nation is facing amid the coronavirus pandemic and associated economic slowdown.
The most recent 2020 budget implementation report shows a 100 percent shortfall in the Half Year actual revenues compared to budgeted revenues from a wide range of sources including FGN share of NLNG Dividends, Revenue from Government owned Enterprises (GOEs), Top 10 GOEs operating surplus, Domestic recoveries Assets and Fines, stamp duty and grants and donor funding among others.
As a result of the zero inflows a shortfall of N1.267 trillion was recorded as at June 2020, compared to the N2.9 trillion in budgeted revenues expected to fund the budget.
“Overall, the size of the budget has been constrained by our relatively low revenues,” Zainab Shamsuna Ahmed, Nigerian Minister of Finance, Budget and National Planning, said during the presentation of the 2021 budget proposals.
“We are leveraging technology and automation, plugging fiscal drainers and ensuring more effective Independent revenue monitoring in our efforts aimed at addressing revenue leakages.”