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Oil prices .. Will Nigeria be pushed into the abyss of bankruptcy?

…Cost of debt servicing was 99% of total revenue in the first quarter of 2020

  • Almost all revenue is equal to the amount required to pay off the debt service obligations
  • Falling oil prices caused the budget deficit by 30%
  • Oil represents 90% of foreign exchange earnings and more than half of government revenue
  • Monetary Fund: Nigeria is at increased risk due to the oil crisis
  • The total budget deficit is 52%, and the public debt is close to 30%.
  • The World Bank expects the Nigerian economy to contract by 3.2%, the worst since the 1980s

While reflecting the impact of the oil price collapse on the poorest member states of the OPEC, whose budgets depend mainly on its revenues, as well as the repercussions of the devastating economic Coronavirus, Nigeria experienced in the first quarter of 2020 the highest cost of debt service ever, amounting to 99% of the total revenue of this African country.

This came in a report issued by Zainab Ahmed – Minister of Finance, Budget and Federal National Planning in Nigeria – on medium-term spending and financial strategy.

A quick review of the data reported by the report shows that in the first quarter of this year, Nigeria incurred a total amount of 943.12 billion Nigerian naira in debt servicing, while the federal government revenue amounted to 950.56 billion naira. This means that Nigeria’s debt service to revenue ratio is estimated at 99% during the period.

This dreadful ratio indicates that all revenue from both oil and non-oil sources is equal to the amount required to pay off debt service obligations.

Nigeria, like the rest of the world, is struggling with a Covid epidemic-19- and has been expected to suffer from a large revenue shortfall. However, the data indicates that the government may have seen a significant drop in revenue, before the economic downturn caused by the closure measures to contain the Coronavirus, indicating that things could actually be worse than expected.

Oil revenue

According to the data, the state generated revenues of 950.5 billion naira from the target budget and its divisions, which amounted to 1.9 trillion naira, meaning that the budget deficit rate reached 52%. Oil revenues reached 464 million naira, representing a 30% budget deficit.

The largest oil exporter in Africa depends on crude oil sales, to get about 90% of foreign exchange earnings, and more than half of government revenue. Oil prices fell sharply due to the decrease in global demand for fuel by nearly 30 percent, due to the comprehensive closures aimed at containing the spread of the virus.

Despite the recorded deficit in revenue, recurrent government expenditures (debt and non-debt) remained in line with budget expectations. According to the data, the debt service increased for the first quarter of the year to 943.12 billion naira, divided into domestic debt (594.23 billion naira), external debt (129.51 billion naira), and other benefits amounted to (219.38 billion naira).

Recurring non-debt spending was 1.1 trillion naira, which is largely in line with budget expectations, a common feature of the past two decades. However, capital spending reached 139.7 billion naira, which represents an increase of 71.3% over the target, as capital expenditures required severely suffered from another decline.

Is Nigeria “bankrupt”?

The continued depletion of Nigeria’s revenues raises questions about the solvency of the Nigerian economy. In general, debt sustainability can be explained by calculating the debt-to-GDP ratio, or debt-to-income ratio.

Given that Nigeria’s total public debt is less than 30% of GDP, the country’s debt burden appears to be relatively light, compared to many other countries.

At the same time, linking debt to GDP is not the best indicator of debt sustainability, especially in a country where the tax on GDP is low.

For Nigeria, the best indicator of debt sustainability is the debt service to revenue ratio, which in Nigeria has increased in recent years to alarming levels, until it has now reached 99% in the first quarter of 2020.

The World Bank expects the Nigerian economy to contract by 3.2% in 2020, which would be the country’s worst economic performance since the 1980s.

In 2019, former Nigerian central bank governor Sanosi Lamido announced that Nigeria was “going bankrupt” after the African Development Bank revealed that Nigeria was spending more than 50% of its revenue on debt servicing, which was worrisome.

Grim look

With the economy likely to be on its way to recession, government revenues – especially non-oil revenues – could remain low in this quarter and the next quarter. This means that the government will still need to rely on debt borrowing, to fund its activities.

And recently, the National Assembly (parliament) approved a further $ 5.5 billion loan to the federal government, adding pressure on Nigeria’s debt service to revenue ratio.

Although the recent rise in crude oil prices represented a positive development, Nigeria is still facing a reduction in its crude production, and will earn less than expected oil revenues. The government has also reduced the Crude Oil Standard, as outlined in the Medium-Term Expenditure Framework.

Nigeria lowered its estimates of crude oil production in the 2020 budget from 2.18 million barrels per day, to 1.9 million barrels per day (of which 400,000 barrels per day are condensate), which is in line with its share of the production cut agreed at the recent OPEC + meeting to stabilize the market. Global oil.

Excluding condensate, Nigeria’s share of production, according to the agreement, is 1.48 million barrels per day.

The average oil production reached 2.1 million barrels per day in the first two months of the year, before the collapse in demand and price with the closure of most economies.

Crude producers face great difficulty selling crude oil shipments, forcing them to offer significant price discounts to attract buyers.

Close the wells

However, the low volume of production enabled the National Oil Company to close some of the high-cost oil wells, and then reduced the average cost of production, from approximately $ 33 to less than $ 28 a barrel, according to a report by the Ministry of Finance, Budget, and Federal National Planning.

These challenges also indicate that the government may have to rely on central bank financing to cover the revenue deficit. The government has in the past relied on bank loans to finance recurrent expenditures, because in future it pays off the flow of oil revenue.

According to the World Bank and International Monetary Fund debt sustainability framework for low-income countries, issued in 2020, the country’s debt service should not exceed the minimum income of 23%.

However, Nigeria has now reached this rate at 99%, which means that out of every 100 naira obtained by Nigeria in the first quarter of 2020, 99 naira went to debt servicing.

This is a non-sustainable model for Nigeria, and cannot last for long. At some point, the government will have to increase its revenues, or face more spending cuts.

Recently, Nigeria notified the IMF in a letter requesting urgent financial assistance that the decline in crude prices and economic shocks associated with the virus had caused a foreign financing gap of $ 14 billion.

The fund approved all of Nigeria’s $ 3.4 billion request. In a detailed summary of the decision, the IMF warned that Nigeria was still exposed to increased risks, especially in oil markets.