FSDH Merchant Bank has projected that the federal government will borrow up to N2 trillion to finance its budget in 2018, describing the nation’s debt service-to-revenue ratio, which rose to 79 percent in first quarter 2018, Q1’18, as very high and unsustainable.
The bank also warned that the country cannot afford another level of naira devaluation as this will further worsen the public debt position. These were highlights of the July edition of the bank’s monthly economic and markets outlook entitled: ‘Public Debt Vulnerable to Exchange Rate Movement.’
Speaking at the presentation of the report, Head of Research, FSDH Merchant Bank, Mr. Ayo Akinwunmi, said: “The signed 2018 budget comes with a deficit of N1.95 trillion and net borrowing of N1.64 trillion. The federal government says the net borrowing would be financed from N793 billion domestic borrowing and N849 billion foreign borrowing.
FSDH Research expects a supplementary budget to cover additional critical projects and fuel subsidy payment. This may bring the total borrowing in excess of N2 trillion in the 2018 budget implementation. FSDH Research expects that the budget deficit financing activities of the FGN may lead to an increase in yields in the domestic market from current levels. Corporates and governments may also soon start borrowing at higher interest rates from the domestic market.”
Speaking on the vulnerability of the country’s rising external debt to the dangers of naira devaluation, Akinwunmi stated: “Nigeria’s total public debt (domestic and external) increased to N22.71 trillion in Q1 2018 from N12.6 trillion in Q4’2015. FSDH Research notes that the growth in the debt stock is mainly driven by external debt and was accelerated by the devaluation of the Naira. FSDH Research believes that Nigeria cannot afford another level of devaluation, otherwise it will worsen the debt position. “Further analysis shows that the domestic debt stood at N15.96 trillion, accounting for 70.28 percent of the total public debt, while the external debt stood at N6.75 trillion, accounting for 29.72 percent of the total public debt.
The ratio of external debt to total debt at 29.72 percent is lower than the target of 40 percent. Meanwhile, the revenue of N813 billion from the Federation Account Allocation Committee, FAAC, to the FGN in Q1 2018 was the highest in two years. “FSDH Research analysis shows that the ratio of domestic interest payment to the FGN revenue from the FAAC stood at 79 percent as at Q1 2018. The average in the last two years is 60 percent. This current rate is very high and unsustainable. FSDH Research believes that measures to grow non-oil revenue will help to achieve and sustain a comfortable debt service to revenue ratio below 30 percent.”