We endorse the expansionary fiscal stance of the FGN since it underpins the prospect of lifting the economy out of recession this year. This is the hope of the authorities as well as a plausible independent view, which happens to be our own. Caution is warranted on two grounds. First, the quality of spending and the value for money has to be better than that of previous administrations. Second, the expansionary stance must have a limited life span if the burden of domestic debt service is not to suffocate the economy and take the said “crowding out” of lending to the real economy to a new level.
The data release for end-2016 from the Debt Management Office (DMO) shows that this burden has soared from N354bn in 2010 to N1.23trn in 2015. Domestic payments account for more than 90% of total debt service because the FGN’s external obligations are predominantly loans from multilateral and bilateral agencies, and far less costly than its domestic borrowings.
The DMO’s medium-term debt strategy seeks a 60/40 split between the FGN’s domestic and external borrowings, compared with the 76/24 blend at end-2016, but that is a detailed subject for another day. The Eurobond roadshow in February was a great success because it told the story of Nigeria’s healthy external balance sheet.
Total debt service last year reached 35.4% of projected total FGN revenue. The ratio is particularly alarming because revenue collection has been so poor. The slide in the oil price since mid-2014 has highlighted the derisory level of non-oil tax collection. The FGN has a number of initiatives in place to boost this level. However, we urge patience. There are some quick wins to be had from closing loopholes but these are small in relation to the challenge of engineering change in the culture of paying tax
Gregory Kronsten
Head, Macroeconomic & Fixed Income Research
Source: Business Day, 3 April, 2017.
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