Nigeria needs to negotiate debts this year to avoid default next year – Report

NIGERIA needs to negotiate for easier terms on debt portfolios this year to avoid a debt trap by 2024, a white paper shared by APO Group, a pan-African communications consultancy, has suggested.

In the report shared on Tuesday, April 25, Nigeria, Ghana and Kenya topped the list of African countries expected to seek a unique treatment out of their debt obligations.

While the federal government of Nigeria had in December last year denied having any plan to restructure its debt, the country’s total public debt stock of N46.25 trillion as at December 31, 2022 remains a concern, The ICIR can report.

Primarily, what Nigeria needs to do is focus attention on negotiating its domestic debt, which stands at N27.55 trillion, since the cost of servicing it has become unaffordable owing to increasing benchmark rate resting at 18 per cent in March, from 11.5 per cent in January 2022.

According to the report, the Nigerian government has passed a wrong message on the need for a potential debt restructuring, and the extent such a treatment would take.

While an external restructuring seems unlikely in the immediate outlook, a domestic debt swap is on the cards in 2023, despite concerns over its rationale.

“Transparency over Nigeria’s debt profile, future central bank lending policies, and relations with creditors will determine whether Nigeria is heading towards a managed debt treatment in 2023 that would reset its debt profile on a sustainable path, or if the country is facing a debt crisis and potential non-payment scenario,” the report stated.

The chief executive officer of Pangea-Risk, Robert Besseling, added, “If Nigeria’s central bank does not cease its controversial direct budget financing and development funding policies later this year, the country’s debt position will significantly deteriorate and make a painful restructuring inevitable.”

Although Nigeria’s public debt-to- gross domestic product (GDP) remains below the 40 per cent threshold that is considered healthy for a developing economy, the report argued that its debt servicing costs had become unaffordable.

Debt-service costs consumed 83 per cent of government revenue in the first eight months of 2022, the report stated, before spiking to 113 per cent, and then stabilising at 103 per cent by the end of 2022.

It blamed the main cause for the unaffordable cost of Nigeria’s debt on the rising cost of goods and services – headline inflation which has risen to 22.04 per cent in March this year, from 15.60 per cent in January 2022.

In recent times, the federal government has become more dependent on loans from domestic sources of credit, rather than borrowing from international debt markets.

The report showed that about $1.8 billion was used in servicing domestic debts in the third quarter of 2022, compared to $800 million used for external loan servicing in the same quarter.

Meanwhile, the government plans to convert the expensive high-interest bearing loans into 40-year bonds with a coupon of nine per cent. This swap, the report showed, would contravene section 38 of the Central Bank of Nigeria Act, also known as the Ways and Means Act.

This scenario would also have worrying liquidity implications for some of Nigeria’s largest commercial banks that hold significant debt issued by the federal government.






     

     

    The report expected Nigeria to rein in its heavy borrowing costs that now consume all state revenues, while curbing increasing inflation rate.

    It stated that in the longer-term, the apex bank would also have to phase out its development finance activities, which the International Monetary Fund (IMF) warned creates efficiency costs and market distortions.

    Nigeria is expected to swear in the President-elect, Bola Tinubu, on May 29

    The managing partner at Acre Impact Capital, Faisal Khan, said , “An orderly and peaceful conclusion of elections with the new president coming into office in May, followed by a much-needed reform agenda, could certainly provide an upside to Nigeria’s growth prospects and credit performance.”

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