LAGOS — The Federal Government has been advised against taking on further debt by the Debt Management Office (DMO), which claims that this year’s revenue would be utilized to pay debt to the tune of 73.5%.
The estimated FGN debt service to revenue ratio of 73.5% for 2023 is too high, cannot support greater levels of borrowing, and also poses a danger to the sustainability of the debt, according to the DMO.
In order to achieve a sustainable Debt Service-to-Revenue ratio, the DMO encouraged the FG to concentrate on boosting revenue production, emphasizing that FGN income must increase from the N10.49 trillion envisaged in the 2023 budget to around N15.5 trillion.
Following an examination of the country’s debt profile in 2022, it issued this warning as part of recommendations to the federal government.
“The analysis of the results of 2022 MAC-DSA shows that the Total Public Debt-to-GDP ratio is projected to increase to 37.1 percent in 2023, compared to 23.4 percent as at September 2022, due to the inclusion of the N8.80 trillion (new borrowings) for the year 2023, the FGN Ways and Means at the CBN of over N23 trillion, and estimated Promissory Notes issuing,” the DMO stated in the report of the Annual National
“Baseline Scenario: The Country’s Debt Stock Remains Sustainably Under These Criteria, although the Borrowing Space Has Decreased Compared To Nigeria’s Self-Imposed Debt Limit Of 40% Set In The MTDS, 2020-2023.
On the other hand, the FGN debt service-to-revenue ratio, which will be 73.5 percent in 2023, will be higher than the suggested level of 50 percent as a result of low income, necessitating a considerable rise in taxation.
“Under the alternative scenario, the FGN Debt Service-to-Revenue likewise surpasses the advised threshold of 50%, and the total public debt-to-GDP ratio of 45.4% in 2023 exceeds Nigeria’s self-imposed debt limit of 40%.
“The DMO advises the following based on the study of the 2022 MAC-DSA results:
Despite the baseline analysis projecting the total public debt-to-GDP ratio at 37.1% for 2023, which indicates a borrowing space of 2.9% (equivalent to about N14.66 trillion) when compared to the self-imposed limit of 40%, it is advised that this should not be used as a basis for higher levels of borrowing as was the case in the 2023 budget.
“This is due to the shock scenario’s outcome exceeding the self-imposed limit, which is more feasible given the circumstances.
“The predicted FGN debt service-to-revenue ratio for 2023 is high and a risk to the sustainability of debt at 73.5%. It implies that larger amounts of borrowing cannot be supported by the revenue profile.
“Increasing FGN income from the N10.49 trillion predicted in the 2023 budget to around N15.5 trillion will be necessary to achieve a sustainable FGN debt service-to-revenue ratio.
“In order to slow the rate at which the public debt is increasing, the Fiscal Responsibility Act of 2007 and the Central Bank of Nigeria Act of 2007 as it relates to Ways and Means advances must be strictly followed with regard to the expansion of the fiscal deficit.
In order to raise the country’s tax revenue to GDP ratio from about 7% (one of the lowest in the world), to that of its peers, it is urgent to pay more attention to revenue generation by implementing far-reaching revenue mobilization initiatives and reforms, including the Strategic Revenue Growth Initiatives and all its pillars.
“To reduce the budget deficit and borrowing, the government should encourage the private sector to finance infrastructure projects through Public-Private Partnership, or PPP, programs and remove capital projects from the budget that are being funded by borrowing.
Government borrowing can be decreased by selling off or privatizing assets.
Debt service-revenue situation very precarious —Abidoye
In response to the warning from yesterday, Tunde Abidoye, Head of Equity Research at FBNQuest Securities Limited, advised the FG to follow the DMO’s recommendations since the country’s debt service-to-revenue ratio was extremely dangerous.
According to the debt service to revenue ratio, the government is genuinely in a very hazardous position, he added, thus following the DMO’s recommendations is the proper course of action.
The ratio of debt service to revenue may even be greater according to certain estimates, and debt to GDP has never been a reliable indicator.
“If we take the United States as an example, their debt-to-GDP ratio is close to 100%, yet their debt service-to-revenue ratio is relatively low. It resembles Nigeria’s antithesis. Therefore, they don’t need to worry as much.
Therefore, the DMO has made the appropriate recommendations, and it is now up to the fiscal and monetary authorities to follow them, particularly in the case of issues like Ways and Means, where, as we saw during the previous administration, there was open access to printing money and other related activities.
“I believe that all of those restrictions need to be followed, along with some form of discipline. So I’m hoping the FG pays attention to the DMO.
Caution against further borrowing belated —Adonri
Vice Chairman of Highcap Securities David Adonri stated: “This warning from DMO against future borrowing by FGN is overdue because excessive borrowing by the previous government has already hurt the nation’s financial system.
But it’s better late than never, right? Already struggling under the weight of its present debt obligations is FGN. It’s like signing one’s death certificate by adding more. A word from the knowledgeable is sufficient, therefore I hope FGN will heed their advice.
Fuel subsidy removal should lead to less borrowing —Kurfi
Mallam Garba Kurfi, an analyst and managing director of APT Securities Limited, stated: “It is in order to caution about borrowing. “However, since fuel subsidy is removed, I expect less borrowing by the FGN. The other measures taken by government to improve revenue, especially in the increase of crude oil production will improve the finances of FG.”
Process should be led by the private sector —Olayinka
President and CEO of Wyoming Capital and Partners. According to Tajudeen Olayinka, a country’s debt profile depends on the economic priorities of the government and the way the economy is structured in relation to other macroeconomic factors.
‘’A government with a focus on private sector dominance would need less public debt and more private capital to fund projects and stimulate capital creation in the economy, in contrast to a government with a focus on public sector dominance, which would accumulate more public debt.
This is the cause of President Muhammadu Buhari’s previous administration’s significant public debt and excessive borrowing from the Central Bank.
“That is also a contributing factor in the government’s limited ability to generate money and the significantly slower rate of economic growth. The only way to move forward is to let the private sector take charge of the economy’s regular process of adjustment. By doing this, you support the development of jobs, total factor productivity, and quicker economic growth.
President Asiwaju Bola Ahmed Tinubu’s government ought to concentrate on this. The economy is in desperate need of blood infusion and drip.
Marvellous Adiele, Senior Associate, Parthian Partners, agreed with DMO’s suggestions and stated that more borrowing will raise our public debt as well as the percentage of future earnings utilized to pay off debt.
“Our public debt is already at an all-time high (N46.25 trillion as of December 2022), and the government needs to be cautious about further borrowings while improving revenue generation and enacting reforms to reduce deficit financing,” the government needs to be careful about further borrowings.