Soaring cost of domestic debt service

While yesterday we commented upon the still exemplary ratio for domestic debt stock/GDP, today we note the alarming rise in domestic debt service (see chart). Payments have soared from N354bn in 2010 to N1.23trn last year. We focus on the domestic payments because they comprise more than 90% of the total burden, and because the FGN’s external debt obligations are mostly concessional and far less costly than its naira borrowing. There is a point at which this domestic debt service burden becomes unsustainable, and we are not a million miles away from it.
Total debt service in the 2016 budget represented a projected 35.4% of total FGN revenue. The ratio was so dire, of course, because the record of revenue collection has been poor. In practice, collection was even poorer than forecast and the actual ratio was above 60%.
The cost of issuing NTBs has soared, to the benefit of the commercial banks (the main buyers). Since August 2016, the yields on the 364-day paper at auction have settled above 22% (and more than doubled over 12 months).


Soaring cost of domestic debt service Sources: Debt Management Office (DMO); FBNQuest Research

 There are grounds for hope on the horizon. In the short term, the DMO’s front-loading of issuance this year has resulted in sales of FGN bonds at auction totaling N750bn over five months. The still-to-be-signed-off 2017 budget projects net domestic borrowing of N1.25trn.
Secondly, the Economic Recovery and Growth Plan 2017-20 sets out a shift in borrowing strategy in line with the DMO’s medium-term paper on the subject. It has financing of the deficit largely external from next year, rising from 66% of the total in 2018 to 72% at the end of the plan period in 2020.

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