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Is Nigeria slowly falling into a debt trap?

SSA countries are being lured into the classical debt trap. Debt-trap diplomacy is where a creditor country intentionally lends excessive credit to a smaller debtor country, with the intention of extracting economic or political concessions when the smaller country cannot service the loan. Zambia has just declared a default on its sovereign bonds roiling financial markets. That is why some skeptics are weary about the recent approval from the National Assembly for a $1.2bn loan from Brazil. The loan, if approved will exacerbate Nigeria’s debt burden. According to the Minister of Finance, Nigeria’s total public debt stock is projected to increase by 4.84% and 24.73% to N32.51trn in 2020 and N38.68trn in 2021 respectively from N31.01trn (as at June 30, 2020).

The major risk is that the country’s debt service is rising at a time when total factor productivity growth has fallen to –5.9%. The FGN in its 2021 budget is determined to reduce the debt service which accounts for 60% of its independent revenue. However, Nigeria still stands the risk of falling into a debt trap as interest payments become more expensive to fund when interest rates rise.

Headline inflation up again to 14.23% in October 2020

As widely expected, Nigeria’s headline inflation continued its upward trajectory, rising to 14.23% in October from 13.71% in September.  This is the 14th consecutive month of increase and the highest since February 2018.

Interestingly all market sub-indices jumped in October, which indicated that supply disruption as a result of the EndSARS protect did not materialize.  The increase in all sub-indices also instils fear that Nigeria might be approaching an era of hyperinflation especially with the recent 6.25% increase in the pump price of fuel (PMS).

The upward trajectory recorded in the last 14 months is expected to continue in November.  The policy of restricting imports despite numerous impediments to local supply will remain a major driving factor for rising inflation in the coming months.  The unrelenting rise in inflation coupled with a deeper contraction in Q3 GDP (to be released on November 23rd) will make the outcome of the MPC meeting a tough call.

In this edition of the FDC Monthly publication, the FDC Think-Tank analyzes these issues and their implications on businesses and the economy at large.

Enjoy your read!