By Jacques Nel, Analyst, NKC African Economics

The Nigerian government has approved a new Medium-Term Debt Management Strategy (MTDS) for the 2020-23 period. The most important aspect of the new strategy is an increase in the public debt ceiling from 25% of GDP to 40% of GDP. With regard to the composition of debt, the new guidelines set the ratio of domestic debt as a proportion of total debt at a maximum of 70%, which is somewhat higher than the previous ceiling of 60%. New debt tenors will be no less than 10 years, and at least 75% of all liabilities will be in the form of long-term debt. The press release notes that the 40% debt ceiling is still well below the recommended threshold of 55% of GDP as put forward by the IMF and World Bank, while the restrictions on debt tenors aim to limit refinancing risk. Concessional funding from multilateral and bilateral sources will be prioritised.

“The new Strategy had to be re-worked to reflect the global and local economic impact of the Covid-19 pandemic and incorporates data from the revised 2020 Appropriation Act and the Medium-Term Expenditure Framework 2021-23. Thus, the new MTDS adequately reflects the current economic realities and the projected trends,” according to the press release.

The latest official figures show total public debt reaching N32.2trn at the end of Q3 2020, which equates to around 21% of GDP for 2020 as a whole. When incorporating our assumptions of debt accumulation during the final quarter of the year, we estimate public debt closer to 24% of GDP by the end of last year. Official figures suggest that around 62% of government liabilities at the end of Q3 2020 were in the form of domestic debt. Regarding external debt, some 52% was in the form of multilateral debt, 13% in the form of bilateral debt, and 35% in the form of commercial debt.

The structural fragilities of Nigerian fiscal finances have been laid bare by the oil price slump. While the current level of public debt is not in itself concerning, the fact that interest payments equate to around a third of government revenue is cause for concern. The country’s dependence on oil-related revenue and the outlook for international oil prices mean that it is unlikely that the government will be in a position to contain public liabilities over the medium term – our current projections see public debt breaching 30% of GDP in 2023 before steadily trending higher for the remainder of the forecast period. Debt affordability remains a central risk, and the currency denomination of debt will also increasingly become an issue as liquidity concerns persist. It is important to note that the latest official debt calculations assume an exchange rate of N381/$ when converting external debt to local currency. However, when using the parallel market rate of around N463/$ prevalent at the end of September last year, this pushes public debt to around N34.8trn, which translates into 22.7% of GDP – nearly two ppts higher than the official figure.