Nigeria debt service burden appears to be worsening as budget office estimates an increase of around N340 billion in debt servicing cost this year.

This year, Nigeria’s debt service provision is expected to increase significantly by 27 percent from N1.66 trillion recorded in 2017 to N2.01 trillion according to 2018 budget estimates. As a result, up to 22 percent of the N9.1 trillion budget will be used for debt service alone. This compares poorly with South Africa who is using only 10 percent of its budget to service its public debt.

It is worthy to note that debt servicing as a percentage of total budget is lower in South Africa even though the national debt there is higher than in Nigeria. This could be traced to the lower interest rate environment in South Africa which has its monetary policy rate at 6.5 percent compared to Nigeria’s MPR of 14 percent. Also with country risk premium a lot lower in South Africa than in Nigeria, the SA government can raise external debts at lower borrowing costs than Nigeria.

High borrowing cost combined with a very porous tax net has Nigeria spending almost one third of the revenue generated in 2018 to service the national debt. Debt servicing to revenue is up 2 percentage point from 29 percent to 31.8 percent as Nigeria continues to accumulate more debt to fund its regular budget deficits.

Budget deficit for 2018 is N1.95 trillion down from N2.36 trillion in 2017 thanks largely to rising crude oil prices which have raised 2018 federal government revenue estimates higher than the preceding year. The Ministry of Finance is looking to finance the budget deficit with a combination of both external and local debt to lower the overall borrowing cost of the Federal Government.

Up to 90 percent of the projected debt service cost is to be used solely for domestic debt obligations. As at December 2017, domestic debt stood at N12.5 trillion while external debt stood at N5.7 trillion.

The bulk of Nigeria’s debt is long dated bonds which gives the government enough wiggle room to manage its debt load. FBNQuest estimates that only 25 percent of Nigeria’s debt was raised through short term treasury bills. All foreign debt used to fund the budget deficit raised over the past year are long term eurobonds with maturity between 10-30 years.

FBNQuest estimates that the average cost of domestic borrowing is about 13.2 percent. Eurobonds raised in the past year were between 6.5-7.6 percent, almost half the cost of borrowing internally. This informed the government’s move to increase external borrowing in 2018 in order to lessen the overall borrowing cost for the country significantly.

The current debt management strategy is to raise external borrowing to 40 percent of total national debt according to Ms Patience Oniha, director general of Debt Management Office (DMO). External debt previously accounted for just 16 percent of total debt before DMO began implementing this strategy in 2016.

While the debt servicE cost still appears to be manageable at N2 trillion, it appears that the budget deficit of N1.95 trillion could easily have been a lot smaller if Nigeria had access to cheaper interest rate loans.