‘Financial whiplash’ Fiscal indiscipline could exacerbate debt sustainability crisis, expert says

Analysts have said that fiscal indiscipline by the authorities may worsen the debt sustainability crisis in the country.

In recent times, the rhet­oric of Nigeria’s fiscal policy managers over the last decade has been one that downplays the risks around a widening fiscal deficit that has been largely funded by borrowings.

Initial defence of the bor­rowings harped on Nigeria’s benign debt to GDP levels albeit with less focus on debt service to revenue levels.

Analysts at Agusto & Co believe that at a debt to GDP ratio of 30 percent, “Nigeria seems to have what genuinely looks like a benign ratio. But with 76 percent of the Federal Government’s revenue going into debt service alone in 2021, the country genuinely has a debt sustainability crisis that should lead to new thinking”.

Consequently, analysts at Afrinvest, while unveiling the Nigerian macroeconomic review for 2021 and 2022 out­look, titled, ‘A Mix of Bloom and Gloom’, said since attain­ing the decade’s peak of $23.7 billion in 2019, foreign capital flows into Nigeria have contin­ued to decline sharply.

Capital inflow reversals are characterised by a collapse in economic activity and sharp adjustments in the current ac­count. As capital flows reverse, the current account adjusts, forcing the accommodation of domestic absorption.

In a publication, the In­ter-American Development Bank, sudden stops in capital flows are a form of financial whiplash that creates insta­bility and crises in the affect­ed economies. Sudden stops in net capital flows trigger current account reversals as countries that were borrow­ing on net from the rest of the world before the stop can no longer finance current ac­count deficits.

According to NBS data, foreign capital inflows fell 59.1 percent year-on-year to $9.7 billion in 2020, and further to a low of $4.5 billion in nine months of 2021 from $8.6 bil­lion in nine months of 2020.

“Interestingly, this was driven by a synchronised moderation across the three investment flow channels – FPI (down 46.2% y/y), FDI (down 56.2% y/y), and other in­vestments (down 47.7% y/y) – suggesting worsening foreign investors’ apathy for Nigerian assets. Nonetheless, we think that the current high global system liquidity presents an opportunity to the CBN to at­tract foreign capital (even at current yield levels) in 2022, if only a more transparent exchange rate model could be implemented”, Afrinvest ana­lysts said.

After an initial passage of the sum of N13.6 trillion (in December 2020) as 2021 budget, the National Assem­bly (NASS) in July approved a supplementary budget of N982.7 billion, which raised the total expenditure plan for the year to N14.6 trillion from N10.1 trillion.

To support the financing of this expenditure plan, the Fed­eral Government estimated to raise N8.1 trillion in revenue and an estimated deficit of N6.4 trillion was planned to be plugged by domestic and external borrowings of N2.7 trillion each.

“Based on our analysis of the eleven months budget implementation data from the Federal Ministry of Fi­nance, Budget, and National Planning (FMFBNP), the actual performance of the budget was underwhelming. Precisely, actual revenue un­derperformed by 26.0 percent, driven jointly by 46.5 percent and 44.7 percent shortfalls in revenue from oil & gas and other revenues.

“For 2022 budget, the Feder­al Government presented an expenditure estimate of N16.4 trillion to the NASS, however, this amount was raised to N17.1 trillion”, analysts at Afrinvest said.

The NASS also raised the initial revenue projection of the Federal Government by 6.3 percent to N10.7 trillion, which puts the estimated deficit at N6.4 trillion. These projections were anchored on the assumptions of average daily crude oil production of 1.88mbpd, oil price bench­mark of $62.0/bbl., exchange rate of N410.50/$1.00, infla­tion rate of 13.0 percent, and GDP growth of 4.2 percent.

According to Agusto, “In 2022, we estimate that the debt to revenue ratio will cross the 80 percent mark and hover between 85 percent and 90 percent as election in­duced-spending ramps up. While we do recognise the initiatives to grow fiscal rev­enues, Agusto & Co is of the opinion that these efforts will not be enough without due consideration to the expen­diture element of the fiscal balance equation. Plans to more than double the non-debt recurrent expenditure to about N6.9 trillion in 2022 from about N3.5 trillion last year, indicates an absence of fiscal discipline to rein spending largely financed by borrowings.

“We also believe that this administration will not pur­sue other deficit financing op­tions – particularly disposal of assets – in 2022. In 2021, the Federal Government es­timated revenue projections from privatisation at N205 billion but ended the year without any proceeds from divestments of state-owned enterprises. In 2022, the Fed­eral Government has budget­ed N90 billion from the same source. We believe this will also not materialise.

“Overall, we estimate a budget deficit of about N6 trillion in 2022 that will be funded largely by domestic (70%) and foreign borrow­ings (30%)”.

Rtn. Victor Ojelabi

Ojelabi, the publisher of Freelanews, is an award winning and professionally trained mass communicator, who writes ruthlessly about pop culture, religion, politics and entertainment.