While major oil producing nations are counting their gains as a result of the rising price of oil in the global market due largely to the invasion of Ukraine by Russia, Nigeria, biggest economy in Africa and a leading exporter of crude oil is counting its losses. BAMIDELE FAMOOFO reports.
This is a period when the most populous country in Africa should be earning extra foreign exchange from the sales of crude oil as prices of the commodity have soared due to the energy crisis triggered by the war between Russia and Ukraine. But the reverse is the case as Nigeria is incurring more debts because it has to increase payout as subsidy. Nigeria will have to raise more money to be able to subsidize refined petrol for the domestic consumption of its people and scramble for the scarce dollars to continue its debt as foreign reserves keep declining.
This is simply because the country has refused to develop to the level of refining its crude oil for cheap consumption and to be able to earn foreign exchange when it exports the excess petroleum products.
To worsen the situation, the country has not been able to produce enough crude to meet its OPEC quota which would have resulted in more petrodollars for it to finance its budget and finance its ever increasing debts.
Minister of Finance and Budget, Zainab Ahmed recently hinted that Nigeria will spend about N4.6trillion this year to finance petrol subsidy while the budget deficit of over N6.0trillion is begging for attention.
While revenue is dwindling due to poor foreign exchange earnings from crude oil which accounts for about 95 percent of the nation’s revenue, the burden to continue to service debt is increasing by the day as the nation keeps growing its debt portfolio.
At the end of December 2021, the nation’s aggregate debt stock which included both external and domestic debts had increased to N39.556 trillion or $95.779bn. The amount represents total external and domestic debts of FG, States and FCT in the period. In the preceding year, it stood at N32.915 trillion or $86.392bn.
According to the nation’s debt manager, Debt Management Office, the public debt stock for December 31, 2021, included new borrowings by the FGN and the sub-nationals.
For the FGN, it would be recalled that the 2021 Appropriation and Supplementary Acts included total new borrowings (from Domestic and External sources) of N5.489 trillion to partly finance the deficit. Borrowings for this purpose and disbursements by multilateral and bi-lateral creditors account for a significant portion of the increase in the debt stock. Increases were also recorded in the Debt Stock of the States and the FCT.
DMO explained that the new borrowings were raised from diverse sources, primarily through the issuances of the Eurobonds, Sovereign Sukuk and FGN Bonds.
“These capital raisings were utilized to finance capital projects and support economic recovery,” DMO disclosed.
DMO argued that with the total public debt stock to gross domestic product GDP as at December 31, 2021 which stands at 22.47 percent, the Debt-to-GDP ratio still remains within Nigeria’s self-imposed limit of 40 percent.
“This ratio is prudent when compared to the 55 percent limit advised by the World Bank and the International Monetary Fund IMF for countries in Nigeria’s peer group, as well as, the ECOWAS Convergence Ratio of 70 percent,” it claimed.
“While revenue is dwindling due to poor foreign exchange earnings from crude oil which accounts for about 95 percent of the nation’s revenue, the burden to continue to service debt is increasing by the day as the nation keeps growing its debt portfolio”
But economic pundits are totally in disagreement with the DMO’s claim that the nation is still within the comfort zone of borrowing.
Mike Obadan, Economist and Board member of the Central Bank of Nigeria said the argument about Debt to GDP ratio being in the convenient threshold does not hold waters as he said GDP will not be deployed to pay a nation’s debt.
His words: “The debt problem for me is an issue of serious concern. We need to moderate the rate at which we are borrowing. Debt to GDP ratio is slow but you don’t use GDP to service debt. Tax revenue is what you need to service debt because it is a more reliable source of revenue.”
Obadan noted with dismay that the capital projects which the Federal Government is spending the borrowed funds on are not contributing anything to revenue generation to service the loans at the moment and said the government should not continue to borrow at the rate which we are going.
The Professor said he would rather be satisfied if the government borrows dollars to build a refinery which is targeted at meeting local consumption and export that will earn foreign exchange.
He slammed the government for lacking the political will to see through the actualization of the dream of running a modular refinery to refine petroleum products for local consumption and export in the country.
He accused the NNPC of sabotaging the effort of the government by not supplying Crude Oil to the existing Modular Refineries.
He wants the government to assure investors in the oil sector that there will be deregulation so they can be certain to recoup their investments.
Debt servicing becoming a burden
The amount needed by the government to service its debt obligations, especially at the external level which must be done with the scarce dollar, is increasing by the day.
Figures obtained from the DMO showed that the nation has spent a total of about $4.97 billion or N2.07trillion to service debt in the last three years (2019-2021).
A trend analysis carried out by The Point indicated that the burden of external debt servicing has increased consistently in the review period.
For instance, about $1.34billion or N557 Billion was spent in 2019. The figure increased to $1.56billion in 2020 and then to $2.07billion in 2021.
More debts
More provisions must be made to service debt as more loans are being incurred by the government.
In March 2022, the Debt Management Office listed its third Sovereign Sukuk of “N162.557 billion 7-Year 11.200% AL IJARAH SOVEREIGN SUKUK DUE 2027” on The Nigerian Stock Exchange and the FMDQ Securities Exchange. The Sukuk which at the time of issuance was massively subscribed to the tune of N669.124 billion or 446 percent, according to DMO, was issued to finance 44 economic road projects across the six (6)-geopolitical zones. “The DMO started the issuance of Sovereign Sukuk in September 2017 as one of the measures towards attaining its strategic objective of bridging the infrastructure gap in Nigeria to promote job creation and economic growth,” a statement from the debt agency disclosed.
Through the Sovereign Sukuk initiative, which is a domestic debt, the DMO has raised a total sum of N362.57 billion in less than three years.
A troubled reserve
Nigeria’s foreign reserve dropped to $39.86 billion as of the end of February 2022, representing a 0.44 percent decline compared to $40.04 billion recorded as of the previous month.
Apparently, the rally in the crude oil market is not reflecting on the Nigerian external reserve levels despite being a major exporter of crude oil products, especially with the Russia-Ukraine war, which has sent the prices of crude oil above record levels.
The continuous intervention in the FX market by the Central Bank is a major factor impeding the growth of Nigeria’s reserve.
However, Nigeria’s inability to meet up with oil production quota has affected our oil export revenues in recent times.
“The amount needed by the government to service its debt obligations especially at the external level which must be done with the scarce dollar is increasing by the day”
The Organization of Petroleum Exporting Countries increased Nigeria’s production quota to 1.72 million bpd for March 2022 from 1.7 million bpd and 1.68 million bpd in February and January respectively, despite being unable to meet previous targets.
“The decline in our crude oil export earnings means a reduction in FX which would have been used to improve the external reserve. Meanwhile, it is worth noting that the reserve level recorded a marginal increase in the final week of the month under review,” experts at Naira metric explained.
Figures obtained from the Central Bank of Nigeria showed that it spent about $78.51billion to create stability for the naira against the United States dollars in three years.
Breakdown of dollar disbursement to the various markets showed that a whopping $38.47billion was spent in 2019 while $28.64billion was disbursed in 2020. The ability of the CBN to continue to defend the nation’s currency however has continued to decline in the last three years as the ability of the country to continue to attract foreign exchange has continued since 2019 as it declined to $21.81billion in 2021.
It was seen from statistics from the CBN that the quarterly supply of foreign exchange to the market declined sharply from the second quarter of 2020 when covid-19 struck the global economy with the attendant lockdowns, restrictions on global trade and travel, collapse of the international crude oil market, reduced capital inflows and heightened capital outflows.
The foreign exchange reserves maintained a similar downward trend except in the last two quarters of 2021 when the reserves were boosted by two developments: allocation of US$ 3.35 billion to the country by the IMF in August and the successful floating of the Eurobond by the Government US$ 4.0 billion.
Tope Fasua, Economist disclosed that the Central Bank for quite some time now operated a managed float exchange rate system.
“Under this system, in line with its exchange rate stability mandate, it has strived to intervene in the foreign exchange market by supplying foreign exchange,” he said.
Fasua who argued that not even the developed economies can allow their currency to float freely without intermittent interventions argued that the managed-float system adopted by the Central Bank at the moment is the way to go.
In recent years, the CBN has sold forex at the Nigerian Autonomous Foreign Exchange Rate widow (Investors & Exporters or I&E Window), Small and Medium-sized Enterprises (SMEs), Invisibles, and Retail Secondary Market Intervention Sales (SMIS) to ensure stability in the foreign exchange market.
“But its capacity to do so has been constrained by limited availability of foreign exchange and external reserves,” Obadan said.
Obadan pointed out that weak production base and undiversified nature of economy, low productivity, high propensity to import and Import-dependent production structure, compounded by trade liberalization policy are some of the factors that have over the years, contributed to the naira exchange rate instability in terms of incessant fluctuations in the direction of depreciation.
