Nigeria’s external debt rises by N13tn over weak naira

Nigeria’s weak naira has pushed the country’s external debt up by N13.38tn.

Although the total external debt increased by $490m between the first quarter of 2023 and the second quarter of 2023, the value in naira increased significantly, according to data from the Debt Management Office.

The main reason for the wide margin in naira terms is the naira devaluation, which was triggered by the move by the Central Bank of Nigeria to unify the nation’s foreign exchange rates.

On June 14, 2023, the CBN directed Deposit Money Banks to remove the rate cap on the naira at the official Investors and Exporters’ Window of the foreign exchange market, to enable its free float against the dollar and other global currencies.

It said, “The Central Bank of Nigeria wishes to inform all authorised dealers and the general public of the following immediate changes to operations in the Nigerian Foreign Exchange Market: Abolishment of segmentation. All segments are now collapsed into the Investors and Exporters window.”

This led to an immediate decline in the value of the naira. The local currency fell from its 471/$ to 770.38/$ as of last week Friday at the Investors & Exporters FX window, according to data from the FMDQ Exchange.

Meanwhile, the naira has continued to rise and fall on the Investors & Exporters’ window, worsening further in the parallel market and hitting N1000/$ last week.

Following the unification policy of the CBN, the DMO dumped the N460.35/$ rate it used in Q1 2023 and adopted N770.38/$.

This shows a depreciation of 40.24 per cent in the exchange rates deployed by the debt office.

The DMO data showed that Nigeria’s external debt was $43.16bn in Q2 2023, from $42.67bn in the previous quarter.

In naira terms, the debt rose to N33.25tn in Q2 2023 from N19.64tn in the preceding quarter, showing an increase of N13.61tn.

However, the main reason for this huge increase is more of weak naira than new borrowing.

Using the same exchange rate from Q1 of N460.35/$ for Q2, Nigeria’s external debt would have been N19.87tn in naira terms.

However, the weak naira added N13.38tn to the country's external debt in Q2 2023.

It was further observed that from the total external debt, the Federal Government owed $38.81bn while states and the Federal Capital Territory owed $4.35bn.

Our analysis showed that the weak naira added N12.03tn to the Federal Government’s external debt and N1.35tn to that of states and FCT.

It was further observed that Nigeria’s total public debt stock would have been N74tn not N87.38tn, using the previous exchange rate for Q1.

The International Monetary Fund recently said that weaker currencies in Nigeria and other Sub-Saharan African countries are pushing up public debts.

It said, “Weaker currencies also push up public debt. About 40 per cent of public debt is external in sub-Saharan Africa and over 60 per cent of that debt is in US dollars for most countries. Since the beginning of the pandemic, exchange rate depreciations have contributed to the region’s rise in public debt by about 10 percentage points of GDP on average by end-2022, holding all else equal.”

The Managing Director/Chief Executive Officer of Cowry Asset Management Limited, Mr Johnson Chukwu, earlier said that high external debt would impose a huge debt service on the economy.

He said, “This will impose a huge debt service on the economy, particularly at a period when we have low revenue from oil sales. If the revenue from oil sales does not improve, then the government will be struggling to meet that debt service obligation to foreign lenders.”

However, he noted that Nigeria could service its foreign debt at the current level, but a constant increase in debt without a corresponding increase in foreign currency earnings could put the country in a difficult position.

President Bola Tinubu recently said the country could not continue to service its debt with 90 percent of its revenue.

He noted that the country was headed for destruction if that continued.

Tinubu said, “Can we continue to service external debts with 90% of our revenue? It is a path to destruction. It is not sustainable. We must make the very difficult changes that are necessary for our country to get up from slumber and be respected among the great nations of the world.

“To build a great nation, we must make bold decisions; even though it may be painful at the moment, it is not about you and me. It is about our generation yet unborn.”

This may mean that the country may want to explore debt service suspension or relief or maybe restructure its debt.

However, the DMO DG, Ms Patience Oniha, told The PUNCH (me but I work for the PUNCH) that the government has no plan to seek a debt service suspension or restructure its debt.

She said, “With the DSSI, the multilaterals were not giving any relief, only the bilaterals. For Nigeria, we don’t have much bilateral loans. It is very small and they are all concessional.”

She further explained that there were some costs attached to being a part of the debt suspension programme, which made the country to opt-out in the past.

Oniha stressed that the current administration is making significant efforts to boost revenue, which means that the high debt service to revenue ratio is expected to decline.

She told the PUNCH, “You can see a lot happening in revenues. If revenue is increased, your debt service to revenue ratio will improve. So, do you need to restructure?”

Although the Federal Government said it would stop taking on new borrowing, she clarified that the government plans to stick with the borrowing target approved in the 2023 budget.

The former president, Muhammadu Buhari, signed a N21.83tn budget, which had a deficit of N11.34tn.

The deficit would be financed by N8.8tn new borrowings, N1.77tn drawdowns on loans secured for specific development projects, and N206.18bn privatisation proceeds.

The Federal Government said although it is not in a position to keep borrowing, it would still maintain its borrowing plan.

Recently, the Minister of Finance and Coordinating Minister for the Economy,?Wale?Edun, while unveiling an eight-point agenda for the economy, said, “Government is not in a position to borrow if you consider 90 per cent debt service to revenue and behind that, a rising debt to GDP ratio. If you look at the last budget, you will see that there is a borrowing requirement built into it, appropriated by the National Assembly. And that is ongoing.

“It is an indication of the commitment of government to find other sources of funding rather than relying on borrowing and to bring down or even eliminate a certain type of borrowing as soon as possible. That type of borrowing is borrowing for recurrent as opposed to borrowing for capital expenditure, which has a return and which is self-financing.

“The way out is to bring in others, other than government by creating room for those who want to invest – foreign direct investors, domestic investors. By giving them access to, for example, airwaves, spectrum, lands, facilities, so that they can invest, perhaps alongside government in private-public partnership.”

Edun?said that Nigeria can leverage its natural resources to become more self-sufficient financially rather than depending on borrowing like the previous administration.

“Therein lies the route to less reliance on borrowing. And, of course, we do have the God-given asset of petroleum and gas. With better security, as those revenues recover, that means less reliance on borrowing,” he added.