- Diversify Revenue Base to Avoid Debt Crisis – FSDH
The Federal Government needs to urgently implement policies that will grow and diversify the revenue base of the country to avoid imminent debt crisis, the FSDH Research has said.
It stated this in its latest monthly economic and financial markets outlook it titled ‘Interest rate hike in US, hold in Nigeria: What Next?’.
The FSDH said its analysis showed that the growth in Nigeria’s debt was higher than the growth in revenue.
“In addition, Nigeria has the lowest government revenue to Gross Domestic Product ratio at six per cent among some selected countries. Nigeria’s over-dependency on crude oil revenue, combined with volatility in both the price and production of crude oil is the major reason for sluggish growth in government revenue.
“Our analysis of the ratio of the interest payment on domestic debt relative to the FGN allocation from the Federal Account Allocation Committee shows that the FGN is spending too much of its revenue to pay interest on loans. This leaves the government with little resources to spend on critical sectors of the economy that could support strong growth and maintain a healthy economy to generate revenue.”
According to the research by the FSDH Merchant Bank Limited, the current high interest payment relative to revenue may also increase the credit risk of the country.
Although the government had been able to meet its debt obligations (interest and principal payments) so far, the report noted that if the current situation was not addressed, the interest rate on government loans might increase because of the perceived elevated risk.
It noted that this would also lead to higher interest rates for private sector operators.
The report noted that the external environment was becoming tighter than before because of the rising interest rate in the US.
The FSDH research had also forecast that inflation rate would trend upwards to 11.37 per cent in September 2018 on account of high food prices caused majorly by drop in food supply.
It stated, “This short-term inflation outlook means that monetary policy stance will remain tight. We however expect inflation to remain below 12 per cent in 2018.”
The report stated that the persistent demand for foreign exchange in the face of declining inflows led to a consistent drawdown in the external reserves in September.
It said, “The current crude oil price and stable production in Nigeria should support the external reserves in the short term. The current yields on the Nigerian Treasury Bills should also attract more foreign investors and reduce capital flight as foreign investors’ roll over their maturing NTB investments.”
