October 15, 2021/Proshare

by FBNQuest Research                                                                                                                                                                                 

The DMO’s latest quarterly data release brings further evidence that the FGN’s domestic debt service has stabilized, increasing by just 3.2% y/y to NGN323bn in Q2 ’21. The stock of total domestic debt rose by 14.0% over the same period, and of FGN bonds by 17.9%. Equally encouraging is the latest decline in the service of NTBs (Nigerian T-bills) to just NGN15bn in the quarter. Other debt service payments picked up to NGN70bn in Q2, notably principal repayments of NGN50bn of the promissory notes issued to settle arrears due to suppliers, non-oil exporters, contractors and other creditors of the FGN. The weak point in the story is the poor collection of revenue from which the FGN services its debt. Data in the federal finance minister’s presentation of the FGN’s 2022 budget show that total debt service (domestic and external) in January-August this year represented 93.7% of federal retained revenue or 72.9% if we include government-owned enterprises. (The domestic/external mix of total debt service is currently 77/23.). 

These ratios are far worse than in the budget because, as we have often noted, the FGN has a track record of overly ambitious revenue projections. Retained revenue in 8M ’21 amounted to 67.8% of the pro-rata budget. The collection of companies’ income tax and VAT was comfortably ahead of budget although oil revenue disappointed (Good Morning Nigeria, 12 October 2021). 

The outturns published by the federal finance ministry and the Budget Office of the Federation give the fullest picture of domestic debt service to reflect the interest payments on the Ways and Means advances. These are the drawings from the CBN to cover what may be termed the unfunded deficit of the CBN (ie borrowings that are not provided for in the budget). 

The burden is growing strongly, from NGN339bn in 2019 to NGN913bn in 2020 and NGN808bn in 8M in 8M ’21. In line with established practice, CBN financing is not included in FGN debt stocks (or in the DMO’s data releases). If proposals to securitize the advances come to fruition, then it will be added to the stocks and push the ratio for total FGN debt stocks/GDP up by approaching ten percentage points. 

The payments peak in the first and third quarters of the year, when the issuance of FGN bonds has been concentrated. Typically, the DMO’s calendar for its monthly auctions in Q4 ’21 shows the re-opening of three bonds.