Wither Nigeria amid rising debt, crashing revenue? 

By Marcel Okeke

The recent disclosure by Mrs Zainab Ahmed, Nigeria’s minister of finance, budget and national planning, that the federal government spent N1.93 trillion on debt servicing, which was 20 percent higher than the retained revenue (N1.63 trillion) between January and April 2022, literally opened up how a ‘can of worms’ the country’s fiscal profile has become.

In other words, debt servicing exceeded retained revenue by as much as N310 billion in the first four months of 2022, marking the first time that the country’s debt service to revenue ratio would hit or exceed 100 percent. The augury of this development for the nation is, for sure, the commencement of a ‘fiscal wilderness’ of indeterminate duration.

Mrs Ahmed who released this ominous fiscal profile during the 2023-2025 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF and FSP) Public Consultation said, “urgent action is required to address revenue underperformance and expenditure efficiency at national and sub-national levels.” But these prescriptions will not happen overnight, because the current ‘calamitous’ fiscal state was arrived at in spite of strident alarms and alerts over the years by well-meaning local and global stakeholders. Specifically, for instance, the International Monetary Fund (IMF), just last year, warned that debt servicing may gulp 100 percent of the federal government’s revenue by 2023 if the government failed to implement adequate measures to improve revenue generation.

The IMF’s Resident Representative for Nigeria, Ari Aisen, who shared this concern in Abuja while presenting the sub-Saharan Africa Regional Economic Outlook report, warned that, “based on a macro-fiscal stress test that was conducted on Nigeria, interest payments on debts may wipe up the country’s entire earnings in the next few years.” Now, lo and behold, much sooner than expected, the ‘prophecy’ has come to pass – with Nigeria entering a sorry ‘fiscal pass’ – ineluctably. The IMF chief had expressed worry that many African countries, including Nigeria, risked sliding into a critical debt servicing problem unless urgent actions were explored to significantly raise revenue. He said, “the biggest critical aspect for Nigeria is that we have done a macro-fiscal stress test, and what you observe is the interest payments as a share of revenue and as you see us in terms of the baseline from the federal government of Nigeria, the revenue almost 100 percent is projected by 2023 to be taken by debt service.

“It is a reflection of the low revenue of the country. The country needs to mobilise more revenue to be able to have macroeconomic stability. It has become an existential issue for Nigeria,” the IMF chief warned. But while the supply side (revenue) challenge of the fiscal equation subsists, the expenditure side has become even more worrisome; and this is where the incubus called fuel subsidy guzzles trillions of Naira. Minister Ahmed alluded to this when she observed during the MTEF and FSP presentation that the continuous rise in energy costs in the global market could push subsidy on Premium Motor Spirit (PMS) for 2023 to an estimated N6.72 trillion.

She disclosed that petrol subsidy payments grew by 349.42 percent from N350 billion in 2019 to N1.573 trillion in 2021, propelled by the rising price of crude oil in the international market and the falling value of the naira.

Unfortunately, even as these causative factors are identified, the minister said nothing about the nation’s refineries that have been shut down and remained so for so long. And for sure, subsidy payments, rather than shrinking, will keep burgeoning, owing to Nigeria’s 100 percent dependence on importation of refined crude products from the refining countries. So, ceteris paribus, issues in the global market such as the Ukraine war that have caused sustained spikes in the prices of crude oil, will certainly translate to unavoidable huge spending on refined products by Nigeria. And this is the extant scenario of which dimension and direction are beyond the ken and purview of the country. The cost of subsidising PMS in 2020 was N450 billion; it has already hit N4.19 trillion and is still rising!

Apparently rattled by this ugly trend, the federal government has begun projecting fiscal outcomes in the medium term (2023 to 2025) under two scenarios based on the underlying budget parameters/assumptions. Zainab Ahmed gave the breakdown thus: “The subsidy on PMS is estimated at N6.72 trillion for the full year 2023.” This amount, she said, “will remain and be fully provided for by the Nigerian National Petroleum Corporation (NNPC) Limited on behalf of the federation. The second scenario is that the PMS subsidy will remain up to mid-2023 based on the 18-month extension announced early 2021, in which case only N3.36 trillion will be provided for.” She added, however, that both scenarios have implications for net accretion to the Federation Account and projected deficit levels.

But whatever scenario eventually plays out, the more potent but weird threat to the revenue flow of the government is the festering crude oil theft that has left Nigeria producing/exporting crude at far below quotas allocated to it by the Organisation of Petroleum Exporting Countries (OPEC) of which it is a key member. For quite some time now, even as the price of crude oil at the international market was surging to unprecedented high levels, massive oil theft (variously put at 50 to 80 percent of output), vandalism on oil facilities and wilful sabotage, have combined to stifle the nation’s oil export. While Nigeria’s OPEC quota for months now has been around 1.8 million barrels per day, the country’s output has been at around 1.2 million barrels per day; yet, the country has the capacity to produce about 2.3 million barrels per day.

Again, whichever scenario that plays out could be messed up by extant challenges confronting businesses (big and small) namely, high cost of doing business – essentially driven by huge energy cost. To this will be added high cost of funds (credit), induced by tight monetary stance of the apex bank; crashing value of the Naira at the foreign exchange market, which has already made nonsense of all corporate budget projections so far. Fallouts and spillover effects of the Ukraine war, as well as the deepening insecurity in the country scare businesses and investors (existing and potential) to no end. The import of energy transition, a phenomenon that has seen not a few international oil companies (IOCs) fleeing Nigeria actually heightens the nation’s fiscal challenges. Rather than making fresh investments in Nigeria, these IOCs are ‘off-loading’ their assets to local ‘marginal’ operators in the oil sector. All these translate to loss of revenue to Nigeria – leaving the country without any light at the end of its ‘fiscal tunnel’. And borrowing for servicing of public debt, as is now becoming the situation, is, without doubt, a blind alley.

Marcel Okeke, a practising economist and consultant in Business Strategy & Sustainability based in Lagos, is a former Chief Economist at Zenith Bank Plc. He can be reached at: obioraokeke2000@yahoo.com; +2348033075697 (text only)