FDC Whispers – June 26, 2024

Dear Subscriber,

Nigeria’s debt is rising, heightening fears of a debt trap

The total public debt in Q1 2024 increased by 30.4% to N121.67 trillion from N97.34 trillion in Q4 2023. However, in dollar terms, the total debt burden fell 15.5% to $91.46 billion due to the naira’s sharp depreciation of 38% to N1,339.19/$ in Q1 2024. The apparent relief in dollar terms belies the stark reality of Nigeria’s economic challenges. There are mounting concerns about the country’s ability to manage and service its rapidly growing debt.

Mounting debt, climbing interest payments and declining revenues

Moody’s has warned that Nigeria’s debt interest payments could consume up to 36% of the federal government’s revenue in 2024. More concerning is that Nigeria’s high and rising debt levels have not translated into meaningful economic growth and development. Nigeria risks prolonged economic stagnation and heightened fiscal vulnerability without effective strategies to bolster revenue, reduce borrowing costs, and optimize debt management in the near term.

Global interest rate cuts offer potential relief

There is a chance that Nigeria’s external debt servicing costs, which gulped 70% of revenues in Q1’24, could moderate in the medium term. This is because global central banks are cutting interest rates. The Bank of Canada and the European Central Bank reduced rates by 25bps to 4.75%p.a. and 3.75%p.a., respectively. The UK’s May inflation hit the Bank of England’s target of 2%, potentially prompting a rate cut at the next meeting in August. The US Fed is also considering a rate reduction by year-end, as inflation (3.3%: May 2024) remains above target (2%).

Harnessing diaspora dollars for revenue growth

Although lower borrowing costs could free up cash to provide critical infrastructure, it remains insufficient to alleviate Nigeria’s revenue woes substantially. This indicates the need to diversify the government’s revenue base. One such option is harnessing and improving diaspora remittances, which have grown 27% in the last 2 years and contributed to dollar revenues. In 2022, Nigeria accounted for 38% ($20.1 billion) of the total remittance inflows to sub-Saharan Africa ($53 billion). Personal remittances into Nigeria are projected to reach $26 billion by 2025. However, challenges such as high transfer costs hinder Nigeria’s ability to tap into the benefits of buoyant remittance inflows. In this light, Nigeria can learn from Senegal and Ethiopia, which leverage remittances for infrastructure, education, healthcare, and entrepreneurship. The lessons learnt will be foundational to effectively mobilizing the upcoming Diaspora bond issuance.

In this latest edition of Whispers, the FDC Think Tank takes a deep dive into recent economic developments and their impact on your business and corporate strategy.

Enjoy your read!