Nigeria’s debt service-to-revenue ratio positively improved to 74.3 per cent in the first quarter of 2024, marking its lowest level in five years and a positive sign for the economy.
According to an analysis by BusinessDay, this reduction is attributed to factors such as naira devaluation, exchange rate gains, and the partial removal of petrol subsidies.
The Central Bank of Nigeria (CBN) reported that debt service amounted to N1.31 trillion, against total retained revenue of N1.76 trillion during this period.
Historically, Nigeria’s debt service-to-revenue ratios were 120.5 percent in Q1 2022, 123.2 percent in Q1 2021, 96.7 percent in Q1 2020, and 65.8 percent in Q1 2019.
Economists attribute the improvement to several reforms and economic factors.
Adeola Adenikinju, President of the Nigerian Economic Society, noted that increased revenue, partly from exchange rate gains and the removal of fuel subsidies, has outpaced the rise in debt servicing costs.
This has led to a reduction in the debt-to-revenue ratio, even though the actual debt level remains unchanged.
Muda Yusuf, CEO of the Promotion of Private Enterprise, highlighted that revenue improvements from subsidy removal and foreign exchange liberalization have contributed to this positive shift.
He advised Nigeria to enhance its revenue generation to reduce its reliance on debt and suggested borrowing from concessional sources with lower interest rates.
Despite the improved ratio, challenges remain. The Economist has reported concerns over the high debt servicing costs, which may consume a substantial portion of Nigeria’s revenue.
Since President Bola Tinubu’s removal of the petrol subsidy in May 2023, fuel prices have surged, and the naira has depreciated significantly, impacting economic stability.
Tobi Ehinmosan, a macroeconomic analyst at FBNQuest Merchant Bank, noted that while the Q1 2024 revenue was relatively high, Nigeria’s rising debt levels could lead to increased debt servicing costs in the future. He emphasized the need for enhanced revenue capacity, such as increasing oil production and tackling issues like oil theft and pipeline vandalism.
The Debt Management Office (DMO) reported that Nigeria’s total public debt reached N121.67 trillion (approximately $91.46 billion) as of March 31, 2024, a significant increase from N97.34 trillion in December 2023.
Finance Minister Wale Edun highlighted that Nigeria’s revenue-to-debt service ratio had improved from 97 percent in 2023 to 68 percent in 2024, reflecting better revenue management and reduced dependency on Central Bank advances.
Edun assured that the government has reconfigured its revenue management processes to enhance transparency and accountability, aiming to build public trust and manage fiscal obligations more effectively.
The World Bank has expressed concern over rising debt service costs globally, warning of potential financial crises in developing countries.
Indermit Gill, World Bank’s Chief Economist, emphasized the need for coordinated actions to address the challenges posed by high debt and interest rates.
Overall, while Nigeria has made strides in improving its debt service-to-revenue ratio, ongoing economic reforms and prudent fiscal management will be crucial in sustaining this positive trend and ensuring long-term economic stability.
