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1. The Many Faces of Nigeria in 2023: Understanding the Economics of Change
2. Report Summary: 2023 Macro Economic Outlook - The Many Faces of Nigeria in 2023: Understanding the Economics of Change

The slump in crude oil production and revenue combined with rising debt service costs have generated concerns about the fiscal health of the Nigerian government. With the national debt profile set to hit N77trn (around US$120bn) this year up from N44.1tr in 2022 and FG’s debt service cost of N6.3trn corresponding to 29% of total expenditure, the country appears to be in a Fiscal Cliffhanger. But while there is a consensus on the dire nature of fiscal sustainability judging by the government’s books, officials and analysts have differed on the exact nature of the problem, as well as on the right course of action. It is noteworthy to mention that the spike in the country’s official debt profile is because of the FGs plans to securitize the N22.7tr overdraft of the Federal Government drawn in form of ways and means advances from the Central Bank of Nigeria (CBN). For what should be a lender of last resort, the amount in question is enormous and in fact in violation of provisions of the CBN Act 2007 which limit such advances to 5% of the revenue generated by the Federal Government in the preceding year and also requires that all prior overdrafts be settled before any new overdrafts are drawn on the Apex bank.

Since 2020, when the JP Morgan Emerging Market Bond Index (EMBI) Global spread for African issuers spiked the FG has found new issuances prohibitively expensive shoring up the shortfall in oil revenue with foreign loans has been increasingly difficult and expensive. For instance, the Ministry of Finance and Central bank of Nigeria hit the international debt market in March, issuing a $1.25billion Eurobond at a coupon rate of 8.37%, which was 200bps higher than the rate on the previous issuance in 2021 and some 40bps premium over secondary market levels for the on-the-run notes. It became a matter of importance for the Federal Government to prioritize domestic borrowing, particularly by way of Treasury Bills and Bond Issuances as well as CBN ways and means advances. The CBN ways and means advances were preferable because it is readily available as the government did not require to meet certain listing requirements as would be the case with Treasuries and Bonds. But the CBN W&M also comes at a cost. According to the Minister of Finance, the Federal Government services its obligation.

The debt service cost for 2023 is 71% higher than the 2022 estimate due partly to a planned interest payment of N1.2tr for Ways & Means as well as a revenue drag which is expected to improve slightly. JPMorgan had removed Nigeria from its list of emerging market sovereign recommendations that investors should be 'overweight' in because the country has failed to convert higher oil prices to broader fiscal space. The total revenue available to fund the 2023 FG Budget is estimated at N11.05trn, 21% of which is expected from oil-related sources, while 79% is to be earned from non-oil sources. But while CIT, VAT, and Customs collections in 2022, retained revenue underperformed by 29% in 11M 2022. The concerns around debt sustainability and vulnerability are amplified by the country’s rank on Bloomberg’s sovereign Debt Vulnerability Ranking (see table 7 below).

Table 7: 

Borrowing Better for Deficit Financing 

The overall budget deficit for 2023 is N11.34tn. This represents 5.03% of GDP.  The budget deficit is to be financed mainly by Domestic borrowings (N7.04trn), Foreign borrowings (N1.76tn), multi-lateral/bi-lateral loan drawdowns (N1.77bn), and Privatisation Proceeds (N206.18 bn). While presenting the approved 2023 budget to the public, the Minister of Finance noted that as the CBN Ways and Means (W&M) overdraft balance of N23.2tr is financed at MPR +3% and that the government plans to save between N1.8trn and N2trn by converting the existing loans to a 9% paying security with a 40-year maturity and a three-year moratorium. This has raised questions about the over-dependence of the Federal government on printed money from the CBN to prosecute budgetary operations, much in violation of the CBN Act which restricts the use of the W&M facility to a short-term window not exceeding one fiscal year. 

But this episode also raises questions about the debt management strategy of the country. The government borrows domestically and abroad at a high cost that puts a strain on future revenue and foreign reserves. The planned debt servicing cost of N6.55tr in 2023 raises concerns related to:

• The country’s debt stock which was N44.1tr would now rise to N77tr.
• Debt to GDP ratio which was at 22.97% as 9M 2022 rises to 35%
• The debt service to Revenue ratio which reached 80.7% (11M 2022) would remain high in 2023 at 57% (presuming 100% revenue performance).
• Revenue performed 71% as of 11M 2022, if we assume the same performance in 2023, projected revenues for 2023 would come in at N7.84tr while the ratio of Debt service to Revenue rises from 57% in the base case to 84%
• The recourse to the domestic debt market would mean that private-sector borrowing would be crowded out.
• The larger debt repayment burden implies that higher future taxes are in the offing (see illustration 11 below).

Illustration 11: Nigeria’s Debt Profile (N’Tr) (2015 -2023)

With FG debt mounting and its revenue buckling, there is palpable angst and apprehension amongst average Nigerians who anticipate higher future taxes because of the repayment burdens. But experts say ahead of the country lie two paths, one to a scenario of high liquidity which they call ‘Eldorado’, and the other to insolvency.

In the doom and gloom scenario, the FG would continue:

• To rely on revenue from oil exports and royalties from the National Oil company
• To borrow at a higher cost through the issuances of IOUs and Promissory notes
• To rely on taxes as a means of raising revenue, especially while the businesses and economic units concerned operate in contracting sectors.
• To refuse to issue licenses in growing sectors while failing also to offer equity investment opportunities in government-owned assets and companies to domestic investors.

In the Eldorado scenario, Nigeria opens its foreign investment deal book and aggressively increases its deal count. India presents a perfect case in point. The southeast Asian economy a couple of years ago offered deals in 15,000 assets seeking to earn $1.9tr in FDI which translates to a $100bn annual target. Saudi Arabia also adopted a similar model, after launching its 2030 National Transformation Plan in 2017, seeking $200bn in FDI it opened deals opportunities in 16 different sectors.

• FG would substantially increase its Revenues through the issuance of Licenses for greenfield investment in critical sectors.
• It would open equity investment opportunities in government-owned assets and companies through the listing of the same and thereby determining their market values and subsequently recording portfolio gains. 
• Reduce the cost of borrowing by exploring better debt management strategies namely borrowing against the government’s financialized assets rather than borrowing against revenues from crude oil sales that are volatile and declining.
• Increase the accretion to the reserves to improve external sector liquidity and reduce domestic inflation (see illustration 12 below)

Illustration 12: