The Debt Management Office’s (DMO) latest quarterly release on public debt raises further concern about the rising cost of debt service and the sustainability of public debt. The data shows that domestic debt service more than doubled (c.2.1x) y/y to NGN665bn in Q2 ‘22. Underpinning the rising cost of debt service, is a 19% y/y increase in the FGN’s share of the domestic debt stock to NGN20.9trn, and the upward shift in yields on the fixed income market. FGN Bond yields have risen this year due to the market's low levels of liquidity and increased supply of FGN paper on the primary market. Market yields have also benefited from the CBN's tightening of monetary policy.
Principal repayments on promissory notes issued to settle arrears owed to FGN creditors, such as downstream oil marketing companies, non-oil exporters, and other local contractors, increased by almost 470% y/y to NGN287bn. They made up the most significant portion (c.43%) of the total debt service cost.
Interest payments on FGN bonds which accounted for c.39% of total debt service cost increased by c.10% y/y to NGN262bn.
Also on the rise were interest payments on Nigerian Treasury Bills (NTB), which more than quadrupled to NGN81bn.
In addition to the rising debt profile, the FGN’s actual revenue outturns have historically underperformed projections and, more recently, are barely able to cover debt-service costs.
For instance, the budget implementation report produced by the Budget office of the Federation, reveals that the FGN’s actual revenue receipts of NGN1.1trn in Q1 ’22 was -47% below the pro-rata budget target, implying a debt-service-to-revenue ratio of 99.8%.
According to the Medium-Term Expenditure Framework for the 2023 to 2025 period, the debt service-to-revenue ratio is forecast to hover between 75% and 101%, depending on which of the two budget scenarios are adopted.
The monetary policy committee has consistently reiterated calls for the FGN to diversify its revenue base to expand the narrow fiscal space. However, given the structural issues facing the economy, there is no simple fix for this.