The depreciation of the naira has caused the country’s foreign loans to balloon, writes EDIDIONG IKPOTO
Nigeria’s external debt stock (debt owed to foreign entities) has increased by N28tn due to the devaluation of the Nigerian naira against the United States dollar, findings by The PUNCH reveal.
According to the latest debt profile data published by the Debt Management Office, Nigeria’s total debt stood at N87.38tn at the end of the third quarter of 2023.
The total external debt constituted N31.98tn ($41.5bn) owed to foreign entities, which included loans from financial agencies, Eurobonds, and syndicated loans, among others.
A breakdown of the data showed that Nigeria’s external debt spans across multilateral loans owed to the likes of the International Monetary Fund ($2.8bn), International Development Association ($14bn), African Development Bank ($1.6bn), Int’l Bank for Reconstruction and Devpt ($488m).
They also include bilateral loans such as the $4.8bn owed to the Exim Bank of China and $563m owed to the Agence Francaise Development, a $15bn Eurobond and syndicated loans worth $300m.
Cumulatively, Nigeria’s external debt totalled $41.5bn (N31.98tn) as of September 30, 2023, the last debt profile data published by the DMO.
According to the DMO, the Central Bank of Nigeria’s official exchange rate of $1 to N768.76 as of September 30, 2023, was used in converting external debt to naira.
However, with the continued devaluation of naira in the last six months, Nigeria’s external debt has increased significantly.
Much of the damage incurred by the naira began in the early exchanges of 2024, with the apex bank accusing currency speculators of fuelling the free fall of the local currency.
Between Jan 1, 2024, and the close of trading on February 29, 2024, the naira has fallen from 891/$ to 1,609/$, representing a decline of 80.58 per cent.
This also implies that between the September 30 exchange rate of 768/$ (which captures the rate used in the DMO’s calculation) and the current rate of 1,609/$ as of Thursday, the naira has depreciated by over 109 per cent, the implication being that Nigeria’s external debt has increased by over 109 per cent between the period when the DMO published the last debt stock information and February 2024.
The significant rise (in naira terms) of Nigeria’s foreign debt comes amid plans by the Federal Government to raise more funding through borrowing.
At a World Bank/International Monetary Fund Annual meeting in Marrakech, Morocco, last year, the Minister of Finance and Coordinating Minister of the Economy, Wale Edun had confirmed that the government was in talks with the World Bank for a $1.5bn budget support loan.
The minister said the new World Bank loan would be used to finance development, disclosing that the facility would be disbursed to Nigeria very soon.
He said, “On the talks with the World Bank on $1.5bn budget support that is correct. The World Bank is the number one multilateral development bank helping developing countries or funding developing countries, projects and programmes, and sectors.
“It has free money through the International Development Association. It is for the poorer countries and right now, I think we qualify as one of the countries that can borrow from the normal window of the World Bank funding, but also some concessionary IDA funding; and that means that effectively, the interest rate will be zero.”
Nigeria’s continuous recourse to borrowing comes despite warnings by experts and global lenders against the dangers of over-reliance on debt for development needs. These include the International Monetary Fund, which projected that “the Nigerian government may spend nearly 100 per cent of its revenue on debt servicing by 2026”.
The World Bank also warned that the country’s debt, while seemingly sustainable, is “vulnerable and costly”.
The Nigerian Economic Summit Group, a body of private sector leaders, warned against what it saw as the prospect of creating “a debt burden for future governments”.
Debt sustainability concerns
In its Annual National Market Access Country Debt Sustainability Analysis (2022), which included projections for 2023 through 2025, the Debt Management Office said that its Medium-Term Debt Management Strategy targets 70:30 domestic and external debt composition. As of September 2023, Nigeria had already exceeded that projection by 6.3 per cent.
With the significant depreciation of the local currency recorded between September 2023 and February 2024, experts had predicted that the DMO’s threshold for external-local debt was expected to widen.
While speaking with The PUNCH, the President of the Lagos Chamber of Commerce, Gabriel Idahosa, said it would be ‘impossible’ for Nigeria to meet its 70:30 public-external debt ratio due to the free fall of the naira.
Idahosa said, “Nobody, not even the DMO, could have predicted the drop in the value of the naira. Whatever they do in their next report should reflect reality.”
The DMO, in its MTDS, also advised the prioritisation of concessional and semi-concessional funding from multilateral and bilateral sources over market financing in the case of external borrowing.
The alternative or shock scenario of the DMO’s DSA assumed that the fiscal and monetary conditions and the general operating macroeconomic environment would deteriorate should the government fail to address the current economic challenges such as low revenues, subsidy on premium motor spirit and foreign exchange scarcity.
The inflation rate was projected to maintain an upward trend through 2023 and 2024, leading to higher interest rates and monetary policy tightening. This outcome, the report said, would lead to a reduction in GDP and a widening of the fiscal deficit.
In addition, the nominal exchange rate was projected to depreciate to 646.7/$ from
435.57/$ in the Medium Term Expenditure Framework, 2023-2025, while the interest rate would increase by 200 basis points annually from 2023 to 2027.
With the rapid devaluation of the naira in the last eight months, Idahosa pointed out that the DMO would have to rejig the metric for calculating its debt sustainability analysis as the numbers used in the previous report could no longer hold.
2024 debt servicing projection
In its 2024 Appropriation Bill, the Federal Government budgeted the sum of N8.25tn. The assumption of the budget was an exchange rate that would hover somewhere within 800/$.
With the current rate of 1,609/$, this implies that the exchange rate is almost 101 per cent higher than the Federal Government’s peg, a situation that has caused worry among experts and private sector stakeholders.
Experts argued that due to the beating the naira had taken recently, the Federal Government’s plan to spend about N9tn for debt servicing may no longer be feasible unless the government was able to overshoot its revenue projections, which seemed unlikely given a recent admission by the Director-General of the Budget Office of the Federation, Ben Akabueze.
During an interview with The PUNCH, Akabueze attributed the trend of deficit budgets in recent years to low revenues.
He said, “The key is to generate enough revenue to meet our needs. We are not currently there.”
On his part, the President of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, Dele Oye, expressed worry that beyond the damage the forex crisis was wreaking havoc on organised businesses, the government’s budget would become one of the casualties of the continued naira devaluation.
Oye said, “Even the government, this exchange rate situation has made nonsense of their budget because all the things they want to do have already run differently from the figures projected.
“We all know that stability is an important element of business. The currency issue is a major catalyst behind inflation. It affects planning. It affects production. Businesses are afraid to produce because when they do, they cannot recoup to be able to restock. So, if they sell their products at the current rate, they won’t be able to restock. So, what that means is that almost all economic activities will come to a standstill.”
Economists speak
In his reaction, Nigeria’s consultant to the ECOWAS Common Investment Market, Jonathan Aremu, queried the metric through which the Federal Government concluded to peg the exchange rate for its 2024 budget at 800/$.
According to Aremu, the CBN’s decision to pump more naira into the economy has largely been responsible for the devaluation of the currency.
He said, “I believe very strongly that if the volume of physical naira that is available is not much, then the exchange rate will not rise the way it has. So, the government that is pumping naira into the economy should be able to account for the fallen currency.
“If there is an increase in the naira that is available and there is no increase in the dollar from exports, then what do we expect? I think the best thing they can do is to control the increasing naira that is available, and I believe the Central Bank has the tools to do that. It is a quantity theory of money approach.”
He further stated that with the continued devaluation of the local currency, Nigeria’s external debt would continue to increase in naira terms, a development which would put a strain on an already ailing economy.
In his recommendation, Aremu urged the government to emphasise creating the enabling environment for a robust productive sector that would set the stage for increased non-oil exports and less reliance on imported products.
He warned that if this is not done, Nigeria will find itself holding the short end of the stick vis-à-vis the African Continental Free Trade Agreement, as other countries with better production environments would outdo Nigeria with products that would have a more competitive edge.
On his part, an economist at Olabisi Onabanjo University, Prof Sheriffdeen Tella, said the devaluation of the naira would increase Nigeria’s debt in naira terms, but noted that the government may choose to work around this bottleneck by servicing its debts from forex reserves as against using its internally generated revenue.
“The DMO will calculate it using the prevailing exchange rate, and this will tell us how much we are losing. But if they pay directly from our dollar account, it won’t be as painful as it would have been if we paid with naira,” he explained.
According to Tella, the Federal Government may have to start thinking about a supplementary budget given the damage which has been done to the current appropriation bill by the naira devaluation.
He added, “This is why at the time of implementing the budget, they talk about supplementary budget. That is what may happen. The central bank itself has devalued the naira because coming from 400/$ to a budget based on 800/$, it has gone beyond them now.”
