A Review of the Nigerian Energy Industry

How oil price decline may affect Nigeria’s debt repayment plan

Dr. Ngozi Okonjo Iweala05 August 2013, Lagos Nigeria’s debt situation will remain vulnerable to any unexpected large drop in oil prices, a report has said.

The report also pointed out that Nigeria’s debt would remain susceptible to other macroeconomic shocks, even as it urged the federal government to properly manage the situation.

The Ecobank Group gave this warning in a report titled: “Nigeria – Our Insight.”

Disturbed by Nigeria’s rising debt profile, the House of Representatives recently gave its House Committee on Aid, Loans and Debt Management a mandate to investigate what it called the “rising incidence of domestic public debts” owed local contractors across the country, which it said had so far risen above N6 trillion.

The mandate was given following a motion moved by the chairman of the committee Hon. Adeyinka Ajayi while presenting the findings of the committee on the subject matter.

Ajayi had said over N500 billion was being used annually to service domestic debts, adding that the House frowned on that as part of its oversight functions.

According to him, the domestic debt profile began to soar since the country exited the Paris Club debt in 2006, adding that, “the structured domestic debt profile of the nation stood at N6.1 trillion, while foreign debt stood at $6.7 billion or N1 trillion naira as at March 2013”.

Beside this, Nigeria’s external debt has also been on the rise in recent times.
To this end, the Ecobank report pointed out that: “Nigeria’s debt situation will remain vulnerable to any unexpected large drop in oil prices or other macroeconomic shock to the economy; this could lead to renewed debt distress.

“This factor will continue to weigh on the country’s sovereign credit rating. Amid this and other factors, Nigeria’s sovereign foreign currency long-term credit ratings remain below investment grade, albeit with a stable outlook.”

But it noted that the outlook for Nigeria’s ratings compared more favourably than that of South Africa, which has a negative outlook.

“Amid growing efforts to reduce external financing risk, federal government’s domestic debt has emerged as the bigger share of total debt, reflecting increased efforts by the federal government to finance a larger proportion of its deficit from the domestic capital market rather than from international creditors.

“Federal government domestic debt has risen from $10.4 billion (11.7% of GDP) in 2004 to $43.4 billion (16.6% of GDP) in 2012. The stock of domestic debt is likely to remain much higher than external debt, although the government’s recent effort to exercise fiscal prudence should see domestic borrowing fall, remaining well below the federal government’s target of 30 per cent of GDP.

“Already, growth in domestic debt has slowed to 21.7 per cent, down from 40 per cent in 2010. However, despite the downward trajectory in domestic debt, debt-servicing costs remain high (amounting to $4.4 billion; nearly two per cent of GDP in 2012), reducing the fiscal space for investment in otherwise core areas of priority,” it added.

Continuing, the report said the move by the federal government to set aside N100 billion to be used to retire domestic debt would help the country, adding that plans to reduce the bloated civil service wage bill, alongside falling bond yields, would also go a long way in reducing domestic borrowing costs.

– This Day

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