Nigeria’s debt servicing for the first seven months of 2024 surged by 53.63% to $2.78 billion, compared to $1.81 billion during the same period in 2023.
According to The PUNCH, this increase, amounting to an additional $971.47 million, is highlighted in the Weekly International Payments data on the Central Bank of Nigeria’s website.
The data reveals that May witnessed the highest debt servicing expenditure at $854.36 million, followed by $560.51 million in January and $542 million in July.
In contrast, the months of February, March, and April saw lower payments, with June recording the smallest amount at $50.82 million.
In comparison, the highest debt servicing payment last year was $641.69 million in July 2023, with $400.47 million in March 2023.
Other months remained below $300 million, mirroring the lower payment pattern observed this year.
Debt servicing constitutes a major part of the Central Bank of Nigeria’s weekly international payments. The Debt Management Office reports that Nigeria’s total debt was N121.67 trillion at the end of the first quarter.
The DMO report read, “Nigeria’s total public debt stood at N121.67tn ($91.46bn) as of March 31, 2024. The comparative figure for December 31, 2023, was N97.34tn ($108.23bn). Total domestic debt was N65.65tn ($46.29bn), while total external debt was N56.02tn ($42.12bn).”
The Debt Management Office (DMO) clarified the rise in public debt, stating, “The increase in naira terms of N24.33tn is being misinterpreted as new borrowing. The amount represents new borrowing of N2.81tn as part of the new domestic borrowing of N6.06tn provided in the 2024 Appropriation Act, new domestic borrowing of N4.90tn as part of the securitisation of the N7.3tn Ways and Means Advances approved by the National Assembly, as well as, the depreciation in the official naira exchange rate from $/899.39 in Q4, 2023, to $/N1,330.26 in Q1, 2024.”
Regarding the rise in debt servicing, Director of Research and Strategy at Chapel Hill Denham, Tajudeen Ibrahim, supported the DMO’s view that the naira’s devaluation contributed to Nigeria’s increased debt. He also pointed out an additional factor driving the rise.
“One, there is a foreign currency translation impact on the debt servicing, and the second factor is the actual increase in the debt value itself because, in the period that you are looking at, Nigeria has taken on more debt both internationally and locally. Nevertheless, there is some element of currency devaluation in the figure that you are looking at,” he said.
Market experts have cautioned that Nigeria risks falling into a debt trap if it continues to incur more loans at elevated rates. Due to its low credit rating, Nigeria struggles to access cheaper funding, which will lead to rising debt servicing costs and affect both recurrent and capital expenditures.
Experts suggest that Nigeria should either halt borrowing or focus borrowing on capital projects rather than consumption. In May, Fitch Ratings revised Nigeria’s Long-Term Foreign-Currency Issuer Default Rating outlook from stable to positive, affirmed the rating at ‘B-‘, and projected that debt servicing will reach $4.8 billion in 2024.
“Government external debt service is moderate, expected at $4.8bn in 2024 and $5.2bn in 2025 (with $2.9bn of amortisations, including a $1.1bn Eurobond repayment due in November). The government plans to meet its external financing obligations through a combination of multilateral lending, syndicated loans, and potentially from commercial borrowing,” Fitch said in its commentary.
Despite the current administration’s focus on increasing domestic borrowings from the capital market, it is estimated that around 30% of Nigeria’s external reserves come from foreign exchange bank swaps. In 2023, the Federal Government’s external debt servicing payments rose by $1.1 billion to $3.5 billion, with $1.9 billion for market debt and $1.6 billion for non-market debt.
The Federal Government has projected an N8.25 trillion expenditure for debt servicing in 2024. President Bola Tinubu has pledged to break the cycle of overreliance on borrowing and mitigate the strain on government resources caused by debt servicing.
At the subnational level, 22 states collectively spent N251.79 billion servicing debt incurred by previous administrations within the first nine months of their terms, according to a Sunday PUNCH report. Between July 2023 and March 2024, these states also secured new loans totaling N310.99 billion, despite receiving increased monetary allocations from the Federation account. This data was sourced from the budget implementation reports available on Open Nigerian States, a platform supported by the civic organization BudgIT.
In August, Nigeria issued a $500 million domestic FGN US dollar bond as part of a $2 billion program. The bond targets pension funds, banks, Nigerians at home and abroad, and foreign investors.
Analysts, including Professor Uche Uwaleke of Nasarawa State University, believe that this bond issuance could enhance external reserves and help stabilize the Nigerian currency.
Highlighting the potential, Uwaleke, who is also the President of Capital Market Academics of Nigeria, said, “It provides an opportunity to earn a risk-free return on investments given that dollar deposits with banks attract little or no interest, the interest payable to bondholders is exempt from income tax, and it allows retail and institutional investors to diversify their portfolios.
“It provides an alternative, cheaper source to meet the government’s financing needs in a period where the cost of servicing domestic debt is made more expensive by hawkish monetary policy. It should help to strengthen the naira since the dollars raised will be available for intervention in the forex market.”
He added that high demand for the debut bond would embolden the government to further explore the domestic dollar bond market, thus reducing its participation in the naira bond market, a development that would free up capital for the private sector.
However, an economist, Marcel Okeke, warned of the danger of dollarisation of the economy, saying, “There is the danger of dollarisation of the Nigerian economy – especially in this case of a dollar-denominated local bond.”
Okeke, a former Chief Economist of Zenith Bank Plc, added, “Overtly or covertly, therefore, the ongoing issuance of domestic dollar-denominated bonds is outright dollarisation of the economy. Period!
“Section 15 of the CBN Act 2007 states that, ‘The unit of currency in Nigeria shall be the Naira which shall be divided into one hundred kobo.” Section 20 (1) of the Act states that ‘The currency notes issued by the Bank shall be legal tender in Nigeria at their face value for the payment of any amount.’ The ongoing dollar-denominated bond sale in Nigeria, therefore, is an official dollarisation or the introduction of what the IMF calls a ‘bi-monetary’ system.
“The domestic dollar bond issuance and its implied entrenchment of a bi-monetary system by the Federal Government of Nigeria leaves the economy with a dicey outlook. This implicit dollarisation of the Nigerian economy portends a further weakening and relegation of the naira.”
