Inadequate Revenue May Force Nigeria Into Debt Crisis-Rewane

…Says Positive GDP Growth Unlikely Until Third Quarter

The Managing Director, Financial Derivatives Company Ltd, Mr Bismarck Rewane has said that the inability of the Federal Government to raise enough revenue to finance its operation may force the country into a debt crisis.

Debt crisis is a situation in which a government loses the ability of paying back its governmental debt. When the expenditures of a government are more than its tax revenues for a prolonged period, the government may enter into a debt crisis.

In recent times, the Federal Government had been having challenges raising enough revenue to meet its obligations.

For instance, the Federal Government generated the sum of N3.94trn in the 2020 fiscal year, which is about 73 per cent of the target for the 2020 fiscal period.

This means that out of the projected revenue target of N5.39trn for 2020, the government could only achieve the sum of N3.94trn thus leaving a revenue shortfall of N1.45trn.

While oil revenue outperformed its target, the non-oil revenue performance was not too impressive.

The shortfall in revenue in recent times had made the Federal Government to resort to borrowing from the domestic and international financial markets.

For instance, within a three month period covering July and September last year, the total debt stock of Nigeria rose to N32.22trn, figures released by the Debt Management Office had revealed.

According to the DMO, Nigeria’s debt stock grew by N1.214trn between June 2020 and the end of September 2020.

An analysis of the DMO public debt figures showed that 37.82 per cent represented external debts, while the balance of 62.18 per cent was for domestic debt obligations.

It said the Federal and State Governments as well as the Federal Capital Territory recorded increases in their debt stock due to borrowings to enable them to respond appropriately to the COVID-19 Pandemic and to meet revenue shortfalls.

In the 2020 fiscal period, the total amount spent by the Federal Government on debt servicing according to the Minister of Finance, Mrs Zainab Ahmed was N3.27trn.

But speaking at the Nigerian-British Chamber of Commerce Post-Brexit Economic Outlook 2021/22, Rewane, described Nigeria’s debt stock as “astronomically high.”

Rewane in his presentation which was obtained by THE WHISTLER on Tuesday said except the Federal Government can generate adequate revenue to finance its operations, the country may be thrown into a debt crisis.

He said while the Federal Government is expected to avoid more multilateral borrowing from the International Monetary Fund, its deficit financing may likely be sourced from new borrowings and privatization proceeds.

Nigeria’s fiscal deficit in 2021 is estimated at N5.2trn which is 3.64 per cent of Gross Domestic Product.

On the implication of having a debt crisis, Rewane said it could become a disincentive to investment flows as well as result into a high risk of a credit downgrade and increase capital flight.

He also that based on the challenges facing Nigeria, the economy may not come out of recession until the third quarter of this year.

Nigeria went into a second recession in four years with Gross Domestic Product sliding to -6.10 per cent in the second quarter and -3.62 in third quarter of 2020.

The recession was principally induced by the Covid-19 pandemic which affected incomes of households and firms as well as the drop in crude oil prices which led to a massive reduction in government revenue.

With foreign exchange liquidity pressure, inflation rose to 15.75 per cent in December last year, from 14.89 per cent and 14.23 per cent recorded in November and October respectively.

But the Financial Derivatives Boss said that the country’s real GDP growth rate is expected to keep rising but at a slow pace on lingering structural challenges.

He said while the African Continental Free Trade Agreement, the re-opening of the nation’s border, and Covid-19 vaccine availability are expected to support economic growth in the first quarter of this year, the country is not unlikely to experience positive economic growth until the third quarter of this year.

Rewane who is also a member of the Presidential Advisory Council said that while uneven recovery is expected across various sectors, the Construction, Information and Communications Technology and financial institutions will remain fast growing sectors.

He predicted that gradual recovery is expected in the Manufacturing, Trading and Real estate sectors of the Nigerian economy.

Rewane added that the double digit consumer price inflation rate would continue to persist in 2021 with inflationary pressures likely to decelerate on the combined effects of AfCFTA and border reopening.

Inflation rose to 15.75 per cent in December 2020, with food inflation hitting 19.56 per cent while Core inflation stood at 11.37 according to figures released by the National Bureau of Statistics.