People & Money

Sovereign debt, Federal Reserve decision, and Russia

Were Nigeria a business or an individual, banks would have stopped lending to her a long time ago. Yes, the ratio of her debt to gross domestic product (GDP) is not as bad as the discussions around its sovereign debt make out. At 35.71 per cent, surely Nigeria’s debt-to-GDP ratio can only be described as a minuscule portion of the 256 per cent of global output that global debt now comprises. For context and in contrast, it helps to remember that the likes of Japan, Italy and the US closed last year with debt-to-GDP ratios of 256.86 per cent, 154.75 per cent, and 133.28 per cent respectively.

Although, most countries were already carrying large, and growing, debt-to-GDP ratios before the second quarter of 2020, the fiscal buffers which governments had to lend to economies across the world, as they tried to contain the adverse economic fallout of the covid-19 pandemic did add to the burden. In 2020 alone, The Economist estimates that global debt grew by twenty-eight percentage points. Nigeria’s share of this, as with most other countries’ debt, breaks down into two parts.

A domestic component. And an external one. Almost two-thirds of the US$92.63 billion that the country owed as at end-September last year was to locals. One advantage of this is that push comes to shove, government will print the money required to meet the resulting obligations. There is that implication for domestic prices of inflating away the public debt. But as a problem, it is increasingly theoretical in this case. For, truth to tell, that horse long fled the stable. The Central Bank of Nigeria’s monetisation of the federal government’s fiscal deficit has been a fact of macroeconomic policy, here, for some time now.

That leaves us with the not so small matter of the second half of the country’s debt ― the share owed to non-resident lenders. Most striking, at first, in this regard is the transition in the composition of the country’s external debt ― all US$37.96 billion of it as at September last year ― from cheaper multilateral borrowing to more expensive commercial sources. Get this, and you begin to get a proper sense of Nigeria’s debt problems. Just six years ago, multilateral borrowing (on concessional terms) accounted for a little over 70 per cent of our external debt. As at September last year, it was under 50 per cent. In the same period, the commercial component of the country’s external debt has risen from 13 per cent to a tad under 40 per cent. In other words, with Nigeria’s sovereign debt growing rapidly, and more expensive borrowing accounting for a growing share of this, the cost to the economy of servicing the debt will be that much higher going forward.

Still, with the external component of the nation’s debt about equal to the balance on the country’s gross external reserves, we shouldn’t have difficulty meeting obligations on this, even though we might have to break the bank to do so. With oil prices as high as they currently are (the global benchmark blend, Brent, broke the US$100 per barrel mark a couple of days back in response to Russia’s invasion of Ukraine), we ought to have no reason to break the bank just to meet maturing debt obligations. Except that for a variety of reasons we continue to struggle to meet our OPEC+ assigned crude oil production quota. With little or no accretions to the external reserves from higher oil prices, the pressure from rising prices on the federal government’s expenditure line for petrol subsidies then matters disproportionately.

Also Read: Finding a Way Out of Nigeria’s High Debt Costs

This takes us back to what should be your average banker’s concern with the balance sheet of its Nigeria country debtor. No borrower services their loans from their net worth. At some point they may turn to a fire-sale of assets to meet their loan obligations. But that will be only as a last resort; part of a reconstruction after the loan turns dodgy. Otherwise, borrowers take out loans on the strength of their income streams. Despite surpassing its target for non-oil earnings by 18.8 per cent in 2021, the federal government still struggled to meet its overall revenue goals for the year ― as it has done nearly every year since this current assay at democracy commenced. Increases in takings from value added taxes, company income taxes, and Customs collections were more than offset by huge shortfalls in the target for oil revenues. This is why at 7.3 per cent the country’s revenue to debt ratio is one of the worst amongst its peers. Well under South Africa’s 25.1 per cent and India’s 19.17 per cent.

With the U.S. Fed’s Open Market Committee forecast to start raising the federal funds rate next month, and global cost of funds due to rise as a result, Nigeria’s straitened revenue profile remains the major vulnerability from our debt profile. Thanks to Russia (and its invasion of Ukraine), though, this outlook is now in flux. With global output poised to be stymied by the aftershocks from Europe’s first major war in decades, the Fed is unlikely to raise rates as fast as most analysts had called, nor for as many times this year. A quarter-percentage or a half-percentage point raise? Five times this year or seven times? All of these will matter for an economy like ours ― down Shit Creek with few useable paddles.

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