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Diversify Revenue Base to Avert Debt Crisis

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  • Diversify Revenue Base to Avert Debt Crisis

The federal government has been advised to further diversify the country’s revenue base or start reducing the level of its debt by rapidly selling some national assets, in order to avert a debt crisis in the medium term.

Analysts at Afrinvest West Africa Limited gave the advice in a report. However, they stressed that they do not expect a debt crisis in the near term.

Since the start of a prolonged global oil price drop in the second half of 2014, the Nigerian economy has recorded a significant downturn in performance as plummeting government revenues and the resultant FX crisis dragged the economy into its first recession in 25 years.

The Debt Management Office (DMO) recently revealed that Nigeria’s total debt stock increased to N19.15 trillion at the end of first quarter 2017, from the N17.36 trillion at the end of last year. The federal government also raised the sum of $300million through the issuance of diaspora bond recently. Beside the diaspora bond, the DMO had disclosed that arrangement has been concluded for the issuance of the first sovereign sukuk, otherwise known as Islamic Bond or non-interest bond which closed at the end of last month -N100billion to fund road projects. Also, in line with the government’s borrowing plan, there is an outstanding issue of a US$64 million Green Bond.

Multilateral loans were sought from the AFDB (US$646.6million) in addition to bi-lateral loans from the China EXIM Bank, France AFD and Japan JICA. Following improvements in domestic investment landscape at the turn of the year, Nigeria returned to the International capital market after a three-year hiatus, successfully raising US$1.5 billion via Eurobonds this year.

On the domestic front, the DMO has continued with its monthly bond auctions and took it a step further by introducing atypical bonds such as the Savings Bond.

But, Afrinvest in the report pointed out that the country’s 2017 budget projected another record expenditure year, with fiscal deficit estimated at N2.4 trillion – domestic borrowing accounting for 53 per cent (N1.3trillion) of the total while foreign borrowing was projected at N1.1 trillion.

“The rising debt profile is not surprising given the widening budget deficit and large depreciation of the naira; however, the cost of servicing the mounting obligations took up more than 60 per cent of revenue in the first half of 2016 and has become a major source of concern on debt sustainability.

“The major argument for increased deficit spending is that the economy is underleveraged with a debt to GDP ratio of 20 per cent but also hard to ignore is the offsetting low non-oil revenue to GDP ratio. Nigeria’s Tax/GDP ratio is six per cent, which is relatively low when compared to Sub-Saharan Africa peers – South Africa (26.2%) and Kenya (15.4%),” the report added.

It noted that the nation’s tax collection and administration system was still deemed inefficient with multiple tax system and a high tax evasion and avoidance rate. According to the report, despite the recent drive to increase tax revenue, not much has changed in terms of actual results.

In fact, federally collected Non-oil revenue fell 4.4 per cent in 2016 to N3 trillion.

“To their credit, fiscal authorities have doubled down on tax reforms including the recently launched Voluntary Asset and Income Declaration Scheme (VAIDS) which grants taxpayers a time-limited opportunity to regularise their tax status without penalty.

“However, with the economy challenged, the odds of significantly boosting tax revenue in the near term is slim and we expect budget deficits to remain high for the next two to three years. What does this imply for medium term debt sustainability? Our opinion on this is a bit nuanced. The structure of Nigeria’s public debt is heavily tilted towards the domestic market (up to 77.9% of aggregate debt) and this easier to deal with in the event of a credit crisis.

“Foreign debt obligations are also mostly multilateral and bilateral in nature (78.0% of total foreign debts) which are typically long tenured and granted at concessionary rate. Thus, we do not expect a debt crisis in the near term but policymakers will need to further diversify revenue base or start deleveraging to avert one in the medium term,” they added.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Economy

Oil Firms Borrowed N130B From Banks in February – CBN

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Operators in the downstream, natural gas and crude oil refining sectors of the Nigerian oil and gas industry borrowed N130b from Nigerian banks in February amid the significant rise in global crude oil prices.

The debt owed by the oil and gas companies rose to N4.05tn in February from N3.92bn in January, according to the latest data obtained from the Central Bank of Nigeria on Monday.

Operators in the upstream and services subsectors owed banks N1.26tn in February, down from N1.27tn a month earlier.

The combined debt of N5.31tn owed by oil and gas operators as of February 2021 represents 25.29 percent of the N21tn loans advanced to the private sector by the banks, according to the sectoral analysis by the CBN of deposit money banks’ credit.

Oil and gas firms received the biggest share of the credit from the deposit money banks to the private sector.

The slump in oil prices in 2020 as a result of the coronavirus pandemic hit many oil and gas companies hard, forcing them to slash their capital budgets and suspend some projects.

A global credit rating agency, Moody’s Investors Service, said last month that the outlook for Nigeria’s banking system remains negative, reflecting expectations of rising asset risk and weakening government support capacity over the next 12 to 18 months.

“Nigerian banks’ loan quality will weaken in 2021 as coronavirus support measures implemented by the government and central bank last year, including the loan repayment holiday, are unwound,” said Peter Mushangwe, an analyst at Moody’s.

The rating agency estimated that between 40 percent and 45 percent of banking loans were restructured in 2020, easing pressure on borrowers following the outbreak of the pandemic.

Another global credit rating agency, Fitch Ratings, had noted in a December 8 report that Nigerian bank asset quality had historically fallen with oil prices, with the oil sector representing 28 percent of loans at the end of the first half of 2020.

It said the upstream and midstream segments (nearly seven percent of gross loans) had been particularly affected by low oil prices and production cuts.

“However, the sector has performed better than expected since the start of the crisis, limiting the rise in credit losses this year due to a combination of debt relief afforded to customers, a stabilisation in oil prices, the hedging of financial exposures and the widespread restructuring of loans to the sector following the 2015 crisis,” it said.

The rating agency predicted that Nigerian bank asset quality would weaken over the next 12 to 18 months.

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Economy

Fall in Economic Activities in Nigeria Created N485.51 Billion Fiscal Deficit in January -CBN

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The drop in economic activities in Africa’s largest economy Nigeria led to a N485.51 billion fiscal deficit in January, according to the latest data from the Central Bank of Nigeria (CBN).

In the monthly economic report released on Friday by the apex bank, the weak revenue performance in January 2021 was due to the decline in non-oil receipts following the lingering negative effects of COVID-19 pandemic on business activities and the resultant shortfall in tax revenues.

In part, the report read, “Federally collected revenue in January 2021 was N807.54bn.

“This was 4.6 per cent below the provisional budget benchmark and 12.8 per cent lower than the collection in the corresponding period of 2020.

“Oil and non-oil revenue constituted 45.4 per cent and 54.6 per cent of the total collection respectively. The modest rebound in crude oil prices in the preceding three months enhanced the contribution of oil revenue to total revenue, relative to the budget benchmark.

“Non-oil revenue sources underperformed, owing to the shortfalls in collections from VAT, corporate tax, and FGN independent revenue sources.

“Retained revenue of the Federal Government of Nigeria was lower-than-trend due to the lingering effects of the COVID-19 pandemic.”

“At N285.26bn, FGN’s retained revenue fell short of its programmed benchmark and collections in January 2020, by 41.3 per cent and 7.5 per cent respectively.

“In contrast, the provisional aggregate expenditure of the FGN rose from N717.6bn in December 2020 to N770.77bn in the reporting period, but remained 14.4 per cent below the monthly target of N900.88bn.

“Fiscal operations of the FGN in January 2021 resulted in a tentative overall deficit of N485.51bn.”

The report noted that Nigeria’s total public debt stood at N28.03 trillion as of the end-September 2020, with domestic and external debts accounting for 56.5 percent and 43.5 percent, respectively.

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Economy

NNPC Supplies 1.44 Billion Litres of Petrol in January 2021

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The Nigerian National Petroleum Corporation (NNPC) supplied a total of 1.44 billion litres of Premium Motor Spirit popularly known as petrol in January 2021.

The corporation disclosed in its latest Monthly Financial and Operations Report (MFOR) for the month of January.

NNPC said the 1.44 billion litres translate to 46.30 million litres per day.

Also, a total of 223.55Billion Cubic Feet (BCF) of natural gas was produced in the month of January 2021, translating to an average daily production of 7,220.22 Million Standard Cubic Feet per Day (mmscfd).

The 223.55BCF gas production figure also represents a 4.79% increase over output in December 2020.

Also, the daily average natural gas supply to gas power plants increased by 2.38 percent to 836mmscfd, equivalent to power generation of 3,415MW.

For the period of January 2020 to January 2021, a total of 2,973.01BCF of gas was produced representing an average daily production of 7,585.78 mmscfd during the period.

Period-to-date Production from Joint Ventures (JVs), Production Sharing Contracts (PSCs) and Nigerian Petroleum Development Company (NPDC) contributed about 65.20%, 19.97 percent and 14.83 percent respectively to the total national gas production.

Out of the total gas output in January 2021, a total of 149.24BCF of gas was commercialized consisting of 44.29BCF and 104.95BCF for the domestic and export markets respectively.

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