Foreign exchange (forex) rate shock, rising interest rate and other crises may push Nigeria’s debt to Gross Domestic Product (GDP) ratio by 4.8 per cent to 30.9 per cent this year.
This is contained in a report by the Debt Management Office (DMO).
The Debt Sustainability Analysis (DSA) 2021 released on Thursday by DMO indicated that unless actions were taken to grow revenue and wholly implement the Petroleum Industry Act (PIA), the naira may crash up to 50 per cent to dollar in 2023.
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Recall that the Euro currency, a central legal tender among European countries crashed significantly this week in parity with the dollar, a situation experts said could throw countries into crises, especially francophone countries in Africa that have reserves in euros.
However, the euro fall brings a mixed feeling for Nigeria which has over 33 per cent of its foreign debt in Eurobonds and has issued N4bn Eurobonds in 2021.
According to the latest DMO debt report, “The real Exchange Rate Shock with depreciating the Naira Exchange rate to the US Dollar by 50%, the maximum historical movement observed over the past 10 years, will increase the Total Public Debt-to-GDP ratio to 30.9% and 30.5% in 2022 and 2023, compared to 26.1% and 25.8% in the baseline.”
DMO in the report said Nigeria adopted the Market Access Country-Debt Sustainability Analysis (MAC-DSA) framework to conduct debt sustainability exercise in November 2021 with support from the World Bank.
Highlighting some of the challenges, the DSA stated that the shocks include primary balance, real GDP growth, real interest rate, real exchange rate and combined macro-fiscal shocks.
For instance, it said the real Interest Rate Shock had an increase in interest rate by 200 basis points (bps).
This will increase the debt service-to-revenue ratio to 29.3% and 32.1% in 2022 and 2023, rising from the baseline projection of 28.7% and 31.5%.
“These developments give further justifications for the adoption of MAC-DSA Framework.”
The report also recommended strengthening implementation of the Strategic Revenue Growth Initiatives to raise revenues, the PIA implementation to attract investments in the oil and gas sector, and a sustained implementation of the National Development Plan (NDP), 2021-2025 for speedy economic recovery.
The DSA report also prioritised rationalising of expenditure by focusing on priority spending on the growth-enhancing sector of the economy.
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