Debt servicing may constitute a major setback for the Nigerian economy in the year 2020, as the latest data obtained from the Central Bank of Nigeria revealed that Nigeria paid a whopping sum of $4.45 billion as external debt service in the first two months of 2020.
According to the data obtained from the CBN covering January and February 2020, the sum of $4.45 billion was paid Year-to-Date (YTD) in 2020 as external debt service, representing a 240% rise compared to the cumulative total debt service payment recorded in 2019.
Debt Service payment hits all-time high
In 2019, the CBN record showed that a total sum of $1.34 billion was paid as external debt service payment. Meanwhile, a closer look at the CBN data showed the sum of $125.4 million was recorded in January, while $4.43 billion in February 2020.
A closer look at the historical trend of external debt service showed that the $4.55 billion paid in February 2020 to service external debt represents the biggest single tranche of payment recorded in Nigerian debt history.
It should be noted that Nigeria is obligated to pay lump sum as external debt obligations to various world organizations like World Bank, African Development Bank, Exim Bank of China, Exim Bank of India and so on. Data from the Debt Management Office (DMO) shows that Nigeria paid over $134.3 million to the World Bank in just Q3 2019.
External debt rose by 616% in 14 years
External debt service continues to hit deep on Nigeria, and this is due to the rising external debt accumulation. Following the successful Paris Club debt deal and the exit from the London Club debts, Nigeria’s external debt stock dropped to US$3.54 billion in 2006. Fast forward to 2019, the country’s external debt rose to $26.94 billion, representing 616% rise in 14 years.
At the end of Q3 2019, data obtained from the DMO database showed that the country’s total debt stock stood at $85.39 billion. Since 2006, Successive government in Nigeria have approached both local and foreign debt market obtain loans to finance their operations.
In terms of GDP, the country’s debt to GDP ratio remains relative sustainable for now at c.18% based on latest DMO debt data, however, the cost of servicing the debt may further put Nigeria in difficult financial strain. In 2019, debt servicing gulped over 50% of the country’s total revenue.
Foreign Reserves extend free fall as revenue source plunge
The outlook for Nigeria’s revenue in 2020 faces a huge problem as the country’s main revenue source (Oil) currently trades at a twenty-year low of $28pb. It should be noted while the drop in oil price significantly affects Nigeria in terms of revenue, debt service obligations is paid regardless and this is sometimes moved from the foreign reserves.
In 2019 (YTD), the foreign reserves dropped by $2.36 billion, a decline that has been largely attributed to the continued fall in oil price due to global headwinds arising from Pandemic COVID 19 and oil price war between one of the two largest oil producers in the world.
What next for the Nigerian economy?
Bearing current realities of revenue crisis, the Nigerian government slashed the price of PMS (Petrol), a move targeted to easing off revenue decline pressure and controversial subsidy payment in the country.
The continued spread of pandemic COVID continue to dampen growth outlook world over, and Nigeria ranks top among countries suffering worst hit in terms of the trickledown effect.
The Group Managing Director, NNPC, Mele Kyari, recently disclosed that as a result of the coronavirus pandemic, Nigeria has about 50 cargoes of crude oil that have not found a landing and this implies that there are no off-takers for them for now due to the drop in demand.
Without mudslinging the current administration at the wheel, Nigeria cannot afford more external debt borrowing. Recall, that the CBN has just embarked on what was described as “exchange rate adjustment or unification”, by collapsing both inter-bank rate and Parallel markets, making them trade at the same rates. While the CBN has said this is not a devaluation, one thing obvious is that this is only an old while in a new bottle. That is, Naira has just been partially devalued.
What it means: With the partial devaluation of naira, it implies for every external debt service obligation Nigeria pays, it will cost more in terms of the dollar value, a luxury Nigeria can no longer afford.