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You are here:Home>>Strategic Research & Analysis>>Nigeria Rising Debt in 2020 and Falling Economy
Tuesday, 07 January 2020 20:07

Nigeria Rising Debt in 2020 and Falling Economy

Written by Administrator
President Buhari and Vice Osibanjo President Buhari and Vice Osibanjo

Nigeria’s public debt stands at N26.2trn as Buhari govt moves to borrow N10.8trn


According to the Debt Management Office, Nigeria’s external debt as at June 2019 was $27.1 billion, with the 36 states and Abuja owing $4.2 billion. Domestic debt level as at June was $56.7 billion, with the states owing $12.9billion . In Naira terms, external debt stood as N8.3 trillion in June and domestic debt was N17.3 trillion.

And  In addition  to the monstrous debt,  the Federal government of Nigerian  is proposing to borrow  additional 22.7 billion dollars

Based on the findings and compilation by Brookings Institute and World Poverty Clock, “Nigeria has overtaken India as the country with the largest number of people living in extreme poverty, with an estimated 87 million Nigerians, or around half of the country's population, thought to be living on less than $1.90 a day.”

When Nigeria’s economy was rebased in 2014, the country’s Gross domestic Product (GDP) stood at USD 510 billion by the end of fourth quarter the gdp rose to USD 568.5 billion  making Nigeria the largest economy in Africa.  The economic development engineered by monetary and fiscal policy was pro-growth was principally driving the economy.  The gdp was rising and growing up to 7-8 percent was realized. With the containing and out rightly taming of inflation rate at less than ten percent, coupled with the speaking up of Nigeria’s brand, the country was a steady growth. I guess good thing never last forever especially in Nigeria.  Then in 2016 the negative growth stepped in and devastated the economy until early quarter of 2017.

Central Bank of Nigeria employed monetary policy tool to mop up liquidity at monetary base due to high inflationary trends. CBN did maintained already jacked up interest at 14 percent  to tame the rising inflation rate which was exceeding 11percent. This scenario triggered illiquidity and credit crunch in the market because borrowing became very expensive.

Below is the further analysis by Bloomberg :

"Budget Woes

The government will need to fund its 10.6 trillion naira ($29 billion) spending plans at a time when economic growth is faltering. Revenue has fallen short of target by at least 45% every year since 2015 and shortfalls have been funded through increased borrowing. In its latest credit report on the country, Moody’s Investors Service warned that the state is likely to take on even more debt and the budget deficit is set to widen further.

“One of our concerns is the authorities seeking central bank financing to fund part of the deficit,” Yvonne Mhango, an economist at Renaissance Capital, said in an emailed response to questions. “That would add to inflationary pressures.”

Inflation reached a 19-month high in November and increases in the minimum wage and power tariffs are adding to price pressures. The west African country has also shut its land borders since August to stem smuggling of items like rice and frozen products, causing food prices to rise by 15% from a year earlier.

Currency Pressures
The risk that the naira will have to be devalued is mounting. The central bank has sought to maintain high yields as an incentive to foreigners to invest in debt denominated in the local currency, attracting large dollar inflows in the process.

While the naira remained relatively stable in 2019, the country’s external reserves are down to a year-low of $38 billion. Yields on naira-denominated debt dropped to an average of 13% at the end of last year, from a peak of 18% in 2017, diminishing their attractiveness to fund managers who are concerned about a possible currency weakness.

“The Central Bank of Nigeria’s de-facto naira peg will likely continue to be under pressure in the near term due to widening imbalance in the current account, which has increased external financing needs amid weaker portfolio inflows,” Omotola Abimbola, an analyst with Lagos-based Chapel Hill Denham Securities Ltd., said by email. “We believe the CBN may be forced to review the market structure in the second half of 2020 to address investor concern.”

Banking Blues
Banks in Africa’s most populous nation ramped up lending in response to pressure from the central bank to raise their minimum loan-to-deposit ratios to 65% by the end of last year, increasing the risk of defaults. And the problem could get even worse if the regulator follows through with plans to increase the minimum ratio requirement to 70%, Abimbola said.
A high proportion of loans have already been restructured, masking the real levels of problematic debt within the banking system, according to Moody’s. "


credits: Afripol, Bloomberg, Guardian

Last modified on Friday, 17 January 2020 16:03

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