By The Editor
The biggest threat to the 2020 federal government budget is rising debt with debt servicing expected to consume 29 percent of revenue. Huge borrowing costs, big enough to jolt the economy, are staring Nigeria in the face in 2020. That was even before the coronavirus-induced oil price drop exposed the fibrous foundation of the fiscal plan.
Amid the fret in the global economy, Nigeria in 2020 faces an admixture of a debt overhang of $83 billion, rising recurrent expenditure, the biggest debt servicing obligation in history, widening fiscal gap and yet a plan for new borrowings, including the $22 billion external component, which has just been approved by the Senate.
With crude oil prices hitting well below the budget benchmark price of $57 per barrel, the likely big slash of government revenue implies a sharp increase in the share of federal revenue to be devoted to debt servicing. Unmindful of the country’s revenue challenges, fiscal deficits and borrowings are persisting, raising the risk of fiscal crisis by the day.
Preliminary projections indicate the proportion of revenue for debt servicing could be as high as 50 percent. In the light of that possibility, the 2020 budget looks very much like “a debt servicing budget”.
Climbing fiscal deficits and rising debts have characterised Nigerian budgets for many years. Fiscal deficits hovered around N1.9 trillion in 2018 and 2019, rising to N2.17 trillion in the 2020 budget. For the three years, new borrowings have sustained at N1.64 trillion in 2018, N1.6 trillion in 2019, rising to N1.92 trillion for 2020.
Even in the absence of the current downside risk to oil revenue, to be able to service debts of N2.45 trillion from aggregate revenue is considered a tall order. Debt servicing has been choking off the fiscal space by claiming as much as 31 percent of federal government revenue in 2019. In four years to 2020, government would spend over N8 trillion in debt servicing.
Despite that a lot of borrowings have happened already, government continues to pile up new debts, enlarging debt servicing obligations against dwindling revenue. Progressively the government is seen as undermining its future fiscal capacity by building a debt service obligation unsustainable in the face of revenue challenges.
Large budgetary shortfalls across the board marked government revenue scenario in 2019 – which is bound to worsen this year, as economic difficulties increase. A simultaneous skyrocketing of debt profile and widening gap between revenue target and actual receipts is the risk to which the present fiscal conduct exposes the Nigerian economy.
The implication is ominous for the nation – rising debt service crowding out expenditure in critical infrastructures and human development. Recurrent expenditure is drawn down irrespective of shortfalls in revenue and debt servicing is also unmindful of revenue performance.
What isn’t going to happen are capital projects that build capacity for economic growth and development. These adverse trends can be expected to be stretched to yet new limits in 2020.
Government’s borrowings since 2017 have followed a new approach to debt management that seeks to rebalance domestic and external components of government’s debt stock to achieve a 60 percent to 40 percent ratio respectively. The strategy involves increased foreign borrowings to part finance fiscal deficits and refinance short term high cost Nigerian treasury bills with lower cost external borrowing.
The resort to increased external financing has merit as long as stability is assured in the external sector. However in the light of the rapidly deteriorating outlook for external revenue with adverse implications for the naira exchange rate, what initially appeared as cheap foreign loans could turn out to be the most costly debt building expedition. In effect, the step intended to moderate growth in debt service costs might end up accelerating it.
In the absence of internal stabilising mechanisms, the 2020 budget numbers now appear like working papers for the budget review committee to start planning the year’s budget. For the first time in recent years, budget planners expected that debt servicing would be done in 2020 entirely from revenue. Yet it looks quite likely that the biggest proportion of new borrowings ever would have to go into debt servicing this year.
Budget review committee has in its hands a lot of work to do in finding an alternative to oil revenue projection of N2.6 trillion or 31 percent of aggregate revenue that is in danger of disappearing. It has to look for a new source of meeting exchange losses in external debt service payments in the event of a jerk down in the naira exchange rate in the course of the current fiscal year.
It also has to weigh the implications of a possibly sudden change of debt management strategy that would involve a big return to the domestic credit market where the avoidance of a crowding out effect on the private sector has been part of the current strategy.
Such a desperate move is likely to dovetail into the subsisting adverse flow of investment capital driven by macroeconomic policy distortions, exchange rate misalignment and persistent budget deficits. Who will lend to the government under the crushed money market rates carries a big question mark. The weakness in generating revenue may as well extend to difficulties also in raising new borrowings.
High prospects for currency depreciation under pressure from the external sector have always kept foreign investors fretful over Nigerian assets. Naira depreciation is emerging as a danger that hangs on the horizon in 2020. Its anticipation induces investors to move out of naira denominated assets into assets of safer currencies. This happens in order to avoid exchange losses that normally result from depreciation.
Domestic investors are moving in the same direction for the same reason of defending the value of money. Investors are offended by inflation that follows persistent fiscal deficits. With Nigeria’s rising inflation, domestic investors are taking steps to reduce their real holdings of domestic currency in order to protect themselves from inflation tax.
Funding of fiscal deficits through bond sales is equally turning away the attention of domestic investors. Expectations of increased tax liabilities in order to meet the piling debt obligations of government induce domestic investors to move their assets to foreign countries to avoid the potential tax liability, according to findings.
FDI outflows from Nigeria have been growing, according to UNCTAD while Nigerian residents are increasing their holdings of unreported foreign assets. Growing asset drift from naira to dollar is already a reality and poses a real threat even to the ability of government to borrow to service existing debts.