Investigation has shown that the Federal Government has spent N247.46bn more in servicing the domestic component of its public debt in 2017 than it spent in 2016.
According to statistics obtained from the Debt Management Office, the Federal Government spent a total of N1.23tn to service its domestic debt in 2016. However, by 2017, the cost of servicing the debt had gone up to N1.48tn.
This means that the cost of servicing the domestic component of the Federal Government’s debt commitment rose by N247bn within the one year period. This reflected an increase of 20.1 per cent in the cost of domestic debt service.
The DMO confirmed this increase in a report on Domestic Debt Servicing.
It said, “The FGN’s Domestic Debt service as at December 31, 2017, was N1, 476.22bn, compared to N1, 228.76bn in the corresponding period of 2016, representing an increase of N247.46bn or 20.14 per cent.
“This cost comprised principal repayment of N25bn and interest payment of N1, 451.22bn.
“By instrument-type, the debt service for FGN bonds was 66.57 per cent of the total debt service payment, while payments in respect of the FGN Savings Bond, Nigerian Treasury Bills, and Treasury Bonds were 0.03, 30.15 and 3.25 per cent, respectively.
“Further analysis showed that the FGN’s domestic debt service payments rose steadily from N794.10bn in 2013 to N1, 476.22bn in 2017, as a result of the growth in domestic debt stock with relatively higher interest rates.”
Between 2013 and 2014, the cost of domestic debt servicing rose from N794.10bn to N865.81bn. This meant that the cost of servicing rose by 71.71bn or 9.03 per cent.
By 2015, the cost of domestic debt servicing hit the trillion naira mark, rising from 1,018.13bn. This showed that cost rose by 152.32bn, reflecting 17.59 per cent increase. By 2016, the cost went up by 210.63bn, reflecting 20.69 per cent.
Thus, between 2013 and 2017, the cost of serving the Federal Government’s domestic debt went up by N682.12bn. This showed an increase of 85.89 per cent within a period of four years.
The increasing cost of debt servicing (domestic debt in particular) has been a major source of concern for many stakeholders and experts. The trend has also been similar for a number of Sub-Saharan African countries, especially those that depend on commodities for foreign exchange earnings.
The International Monetary Fund, for instance, in November, pointed out that the precarious situation of the country when it said that the nation was spending a high proportion of its revenues on debt servicing.
The Breton Woods financial institution said that the nation spent more than 50 per cent of its revenues on servicing on debts, a situation that did not give room for other necessary expenses.
Speaking at the presentation of the Regional Economic Outlook for Sub-Saharan Africa – Capital Flows and the Future of Work, Senior Resident Representative and Mission Chief for Nigeria, African Department, Amine Mati, said Nigeria was spending more than 50 per cent of revenues on debt servicing.
Mati said that although Nigeria’s debt to Gross Domestic Product remained low at between 20 and 25 per cent, the country spent a high proportion of its revenue on debt servicing as a result of low revenue generation.
He added that the debt servicing to revenue ratio was more than 50 per cent while for sub-Saharan Africa, the rate was about 10 per cent; a figure he said was too high and reminiscent of what the region went through in the period of following debt relief at the beginning of the 21st century.
Mati said, “Security issues are exacting a significant human toll in a number of countries. Debt to GDP ratio is increasing in the past five years. Public debt is diverting more resources towards debt servicing.
“The interest rate has gone up to where they used to be around the year 2000 before debt relief. Adjustment has relied on spending compression rather than revenues mobilisation. Meeting the Sustainable Development Goals will require stronger growth and more financing.”
For DMO, however, rising debt and rising cost of debt payment were necessities occasioned by precarious economic situation as typified by the recent recession that the country went through.
The Director- General of the Debt Management Office, Patience Oniha, said that it was important for the government to borrow especially given the nation’s low revenue generating capacity.
Oniha said, “We are borrowing to be able to increase Forex availability. Government needed to borrow in order to spend the country out of recession.”
Justifying this viewpoint, Oniha said that in 2016, the Federal Government borrowed N2.5tn which was approved by the National Assembly while it proposed to borrow N1.64tn in the current financial year.
In 2019, she added, the proposed debt of N1.5tn had gone further down. She added that the government had taken steps to diversify the economy and increase tax collection which, she said, was lower than in most countries of the Economic Community of West African States.
According to DMO boss, the government has also taken steps to reduce the incidence of high cost of debt servicing. One of such steps is the attempt to rebalance the nation’s sources of loans.
By this, the government has been making moves to borrow more from foreign sources as it plans to raise foreign debt component to 40 per cent of the public debt while reducing the domestic debt component to 60 per cent. The rationale is that domestic debts come with higher interest rates.
The second strategy is similar to the first one – borrow more money foreign sources and use it liquidate some domestic debt. This strategy will also grow the foreign debt component and reduce the local component.
How these strategy works in the long run remains to be seen as experts point out that there are also risks associated with increasing foreign debt component of public debt. One of such risks is the foreign exchange risk.