An increase in domestic debt service in the fourth quarter of 2020


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Monday March 29, 2021 / 08:59 am / By FBNQuest Research / Header Image Credit: FBNQuest

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We can see from our FGN Domestic Debt Service chart that total payments increased 39% year-on-year in the fourth quarter to NGN352 billion. The increase over the year was a more modest 11%. As a rough guide, the stock of domestic debt increased by 12.3% in the 12 months to the end of 2020. The background is the sharp increase in the FGN’s funding requirement (and thus the DMO issuance, which is the main cover for the FGN’s funded deficit).

The COVID-19 virus has taken a heavy tax toll, combining suppressed revenue raising and additional spending to mitigate its impact. Total debt service, domestic and foreign, consumed 95% of the FGN’s total inflows in H1 ’20 according to the most complete definition of the Budget Office (see below), compared to only 51% in the budget. We have to say that the ratio in the budget was already high in terms of comparisons between emerging markets and the resources still available for capital expenditure.

Nor will it (the ratio) improve much quickly. In February, the Federal Treasury Secretary set an aggressive target that total revenue collection would reach 15% of GDP by 2023. to CBN’s tax data, and achieving the target would require at least another NGN15trn.

The full definition of the budget office includes payments in the ways of the FGN and the advances of the CBN in the funds, which are essentially an overdraft. The DMO does not currently record these advances in its debt stock or debt service series. They will likely be securitized, after which they will be included in the data of the DMO.

The budget office shows the total debt service in H1 ’20 at NGN1.57 trillion, consisting of NGN854 billion domestic, NGN252 billion external and NGN461 billion in interest payments on the advances.

The latter payments have risen sharply, from NGN63 billion in 2018 to NGN339 billion in 2019.

The FGN’s budget for 2021 has a total outlay of NGN13.59trn including the total debt service of NGN3.32trn, which would represent 42% of the expected revenues, but which we assume does not include interest payments on the advances. The interest payments underlying the budget are not generally known. Returns on FGN paper plunged in November and December, but rebounded thanks to supply factors (ie the massive budget deficit for funding).

Payments peak in the first and third quarters of the year, when FGN bond issuance was concentrated.

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