DMO cautions FG against more borrowings, warns that 74% revenue already earmarked for debt servicing

The Debt Management Office (DMO) has warned the Federal Government against additional borrowing, saying 73.5 per cent of revenue generated this year will be used to service debt.


According to the DMO, the projected FGN Debt Service to Revenue ratio of 73.5 per cent for 2023 is high and cannot support higher levels of borrowing, and is also a threat to debt sustainability, Vanguard reports.


Consequently, the DMO advised the FG to focus on increasing revenue generation, stressing that attaining a sustainable Debt Service-to-Revenue ratio will require increasing FGN revenue from N10.49 trillion projected in 2023 budget to about N15.5 trillion.


It gave this warning as part of recommendations to the Federal Government, following analysis of the nation’s debt profile in 2022.


According to the DMO in the report of the Annual National Market Access Country (MAC) Debt Sustainability Analysis, “the analysis of the results of 2022 MAC-DSA shows that the Total Public Debt-toGDP ratio is projected to increase to 37.1 per cent in 2023, relative to 23.4 per cent as at September 2022, due to the inclusion of the N8.80 trillion (new borrowings) for the year 2023, the FGN Ways and Means at the CBN of over N23 trillion and estimated Promissory Notes issuance of N2.87 trillion in the debt stock.


“Baseline Scenario: The Country’s Debt stock remains sustainable under these criteria, but the borrowing space has been reduced when compared to Nigeria’s self-imposed debt limit of 40 per cent set in the MTDS, 2020-2023.


“On the other hand, FGN Debt Service-to-Revenue ratio at 73.5 per cent in 2023 exceeds the recommended threshold of 50 per cent due to low revenue, which means that there is need to significantly increase government revenue.


“Under the alternative scenario, the total public debt-to-GDP ratio at 45.4 per cent in 2023 exceeds Nigeria’s self-imposed debt limit of 40 per cent, while the FGN Debt Service-to-Revenue also exceeds the recommended threshold of 50 per cent.


“Based on the analysis of the results of the 2022 MAC-DSA, the DMO recommends the following:


“Although the baseline analysis projects total public debt-to-GDP ratio at 37.1 per cent for 2023, indicating a borrowing space of 2.9 per cent (equivalent of about N14.66 trillion) when compared to the self-imposed limit of 40 per cent, it is recommended that this should not be used as a basis for higher level of borrowing as was the case in the 2023 budget.


“This is because the outcome of the shock scenario, which is more realistic in the circumstances, exceeded the self-imposed limit.


“The projected FGN debt service-to-revenue ratio at 73.5 per cent for 2023 is high and a threat to debt sustainability. It means that the revenue profile cannot support higher levels of borrowing.


“Attaining a sustainable FGN debt service-to-revenue ratio will require an increase of FGN revenue from N10.49 trillion projected in 2023 budget to about N15.5 trillion.


“With respect to expansion in fiscal deficit, there is need to strictly adhere to the provision of extant legislations on government borrowing, especially the Fiscal Responsibility Act 2007 and Central Bank of Nigeria Act, 2007 as it relates to Ways and Means advances, in order to moderate the growth rate of public debt.


“There is urgent need to pay more attention to revenue generation by implementing far reaching revenue mobilization initiatives and reforms, including the Strategic Revenue Growth Initiatives and all its pillars, with a view to raising the country’s tax revenue to GDP ratio from about 7 per cent (one of the lowest in the world) to that of its peer.


“Government should encourage the private sector fund infrastructure projects through the Public-Private Partnership, PPP, schemes and take out capital projects in the budget that are being funded from borrowing, thereby reducing budget deficit and borrowing.


“Government can reduce borrowing through privatization and/or sale of government assets.”


Debt service-revenue situation very precarious —Abidoye


Reacting to the warning yesterday, Head of Equity Research at FBNQuest Securities Limited, Tunde Abidoye, counseled the FG to conform to the recommendations of the DMO, as the country was in very precarious situation with regard to the debt service-to-revenue ratio of the government.


He said: “The recommendations of the DMO are the right things to do because when we look at things from a debt service-to-revenue ratio, the country is actually in a very precarious situation.


“Some estimates of debt service-to-revenue might even tell you it is even higher than that, and Debt-to-GDP has never been a good measure.


“If we take the U.S for instance, the debt-to-GDP is around 100 per cent but when you look at their debt service-to-revenue, it is very low. It is like the opposite of Nigeria. So they really don’t have so much worry.


“So the DMO has given the right recommendations and it is now for the fiscal and monetary authorities to conform, especially when it comes to things like Ways and Means, where with what we saw in the last administration, there was unrestricted access to printing money and all that.


‘’I think all those limits have to be adhered to, and implement some discipline. So I hope the FG listens to the DMO.”


Caution against further borrowing belated —Adonri


David Adonri, Vice Chairman, Highcap securities, said: “This caution from DMO against further borrowing by FGN is belated because excessive borrowing by previous administration has already damaged the financial economy of the country.


“However, it is better late than never. FGN is already choking under the weight of current debt liability. Adding more is akin to signing one’s death warrant. Hope FGN will listen to this wise counsel because a word is enough for the wise”


Fuel subsidy removal should lead to less borrowing —Kurfi


Analyst and Managing Director, APT Securities Limited, Mallam Garba Kurfi , said: “It is in order to caution about borrowing.


“However, since fuel subsidy is removed I expect less borrowing by the FGN. The other measures taken by government to improve revenue, especially in the increase of crude oil production will improve the finances of FG.”


Private sector should drive the process —Olayinka


Chief Executive Officer, Wyoming Capital and Partners. Tajudeen Olayinka said: “The debt profile of a country is a function of the government’s economic focus and structure of the economy, vis-a-vis other macroeconomic factors.


‘’A government with a public sector domineering focus will accumulate more public debt to fund projects in the economy, whereas a government with emphasis on private sector dominance would require less public debts and more private capital to fund projects and drive capital formation in the economy.


‘’This is the reason for massive public debt and excessive borrowing from the Central Bank by the past administration of President Muhammadu Buhari.


“That is also part of the reason for low revenue generation capacity of the government and much lower economic growth. The only way forward is to place the economy on a normal course of adjustment, with the private sector in the driver’s seat. That way, you encourage total-factor productivity, job creation and faster economic growth.


“This should be the focus of the administration of President Asiwaju Bola Ahmed Tinubu. The economy is in dire need of drip and blood infusion.”


Also siding with DMO’s recommendations, Marvellous Adiele, Senior Associate, Parthian Partners, said: “More borrowings will increase our public debt and will also lead to an increased portion of our revenue being used for servicing debt in future.


“Our public debt is already at an all time high (N46.25trn as at Dec 2022) and the government needs to be cautious about more borrowings while improving revenue generations and introducing reforms to reduce deficit financing.”


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