Nigeria must pay attention to rising interest-to-revenue ratio - IMF

The high cost of servicing Nigeria’s debt compared to the revenue it generates (interest-to-revenue ratio) is an indicator Africa’s largest economy must pay urgent attention to its swelling debt servicing cost, the International Monetary Fund (IMF) said Wednesday.

With low revenue generation and the rising cost of debt maintenance, socio and infrastructure spending in the country is bearing the burden as little resources are left for them to share.

“One indicator Nigeria needs to monitor closely is the interest payment to revenue, Ari Aisen, the Resident Representative of the IMF in Nigeria said during a virtual press briefing.

Aisen said Nigeria should watch the indicator “because” its “revenue is not higher and most of the revenue proceeds are being spent to service debt, thus, leaving very little space for socio and infrastructure spending.”

While the World Bank prescribes debt service to revenue ratio of not more than 22.5 percent, just as data from the IMF shows that Nigeria’s ratio was 92 percent in 2020, which means for every N100 earned, the country spends over N92 to service debt.

“If an investment that will be made from the debt issuance will lead to a rise in total productivity, then maybe those debts are justifiable,” Aisen said.

According to the Nigerian resident representative of the Washington-based organisation, it is one thing to contain debt and another thing to manage it properly.

Aisen explained that the latter was as important as the former because it will help ensure that “the spending of the proceeds raised from debt issuance” will “give Nigerians good fruits- increase productivity.”

Analysts use interest-to-revenue as a measure of sustainability in countries like Nigeria which has a relatively open economy and is facing a heavy fiscal burden of external debt. An increase in this indicator over time indicates that the country may have budgetary problems in servicing its debt.

Nigeria’s 2021 budget deficit of N5.60 trillion is expected to be financed mainly by borrowing N4.69 trillion, privatisation proceeds of N205.15 billion and project linked bilateral & multilateral loans of N709.69 billion.

Public debt, which includes general government debt, CBN overdrafts, CBN financing of the power sector, Asset Management Company ( AMCON) debt, and noninterest-bearing promissory notes issued to clear payment arrears (about N2.6 trillion from 2018 through 2022), increased to about 29 percent of GDP in 2019 from 9 percent in 2009. This was driven by large fiscal deficits arising from weak non-oil revenue mobilisation and falling oil revenues.

Nigeria’s total debt profile increased to N31.009 trillion ($85.897 billion) as of June 30, 2020, according to the Debt Management Office (DMO).

With Nigeria’s public debt approaching a level that may become unsustainable, analysts expected the development to crowd out expenditure on capital projects thereby stunting economic development.