The better news on external debt

In stark contrast to the challenging burden of its sovereign domestic debt service, the data for Nigeria’s external obligations are comforting. Total obligations at end-March amounted to US$13.81bn, equivalent to 3.4% of 2016 GDP. The increase in Q1 amounted to US$2.4bn, consisting of Eurobond sales of US$1.5bn as well as higher borrowings of US$260m and US$600m from the World Bank and African Development Bank respectively. Q3 should bring another rise in market borrowings since the FGN is about to embark on a roadshow for its US$300m diaspora bond.

This breakdown of additional external borrowings points to a rising burden of external debt service. Its cost, as we have often noted, is a fraction of that of servicing the FGN’s domestic debt. Looking ahead, the FGN has plans to increase its external borrowings, subject to the go-ahead from the National Assembly: further Eurobond sales, the long-running talks with the World Bank on budget deficit financing and loans from China (including those for public agencies such as the NNPC, guaranteed by the FGN).

External debt service in Q1 2017 was US$130m. If we take the interest and fee payments of US$90m, we arrive at an annualised average interest rate of 2.6%.

The optimal blend of the FGN’s domestic/external debt obligations is 60/40 according to the DMO’s medium-term strategy. The ratio for the FGN at end-March was unchanged at 76/24.

However, the FGN’s fiscal strategy has the deficit largely covered by external financing with effect from next year. The likelihood of further exchange-rate adjustments also suggests a step towards the optimal blend.

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