June 30, 2021/Proshare

By FBNQuest Research  

The FGN’s domestic debt service has broadly stabilized, rising by less than 1% y/y to NGN613bn in Q1 ’21. Encouragingly, our chart shows a shift in debt service away from NTBs (Nigerian T-bills) towards FGN bonds, for which maturities now extend to 30 years. The burden is onerous because of the paucity of revenue collection, for which Nigeria has one of the worst ratios in the EM universe. According to the 2021 budget, total debt service (domestic and external as well as sinking fund contributions) of NGN3.32trn represents 41.6% of total revenue collection. In practice, however, the outturn will surely be rather worse because of a highly optimistic projection of NGN7.99trn for total revenue. On a like-for-like basis, the ratio hit 74.5% in the first three quarters of last year.  After paying the salaries and benefits of its employees, the FGN has limited resources for the capital spending required for the transformation of the economy. 

Nor is it (the ratio) going to improve much anytime soon. In February the federal finance minister set an aggressive target of total revenue collection hitting 15% of GDP by 2023. The outturn was a pitiful 5.9% last year (NGN9.0trn) for gross federally collected revenue (ie before distribution to the three tiers) according to CBN’s fiscal data, and the attainment of the target would require at least another NGN20trn and more like NGN25trn. 

The DMO’s data do not cover interest payments on the FGN’s Ways and Means advances from the CBN. This treatment is in line with established practice.  

There is talk, however, of securitizing these advances. If this takes place, the debt becomes FGN debt and its servicing will be incorporated in the DMO’s quarterly data release. As a point of reference, we note that the budget office shows interest payments on the advances at NGN686bn in January-September 2020.  The cost clearly rises with the size of the unfunded FGN deficit (ie that part in excess of the domestic and external funding targets set the DMO).  

The total shown includes principal repayments of NGN31bn in Q1 ’21 on maturing promissory notes issued to clear arrears due to domestic creditors. Information released by the DMO shows further such repayments of about NGN190bn in the remaining nine months of 2021. The stock of outstanding pro-notes amounted to NGN940bn at end-March and could rise by a further NGN1.50trn subject to the verification of creditors’ claims.  It has, however, barely moved in the past 12 months.

The payments peak in the first and third quarters of the year, when the issuance of FGN bonds has been concentrated.

FGN domestic debt service payments (NGN bn)

Sources: Debt Management Office (DMO); FBNQuest Capital Research