The drop in government’s revenue in the face of the rising government expenditure has led to an increase in Nigeria’s public debt (external and domestic debt). Consequently, the ratio of debt service-to-revenue has reached unsustainable levels. 
The Debt Management Office (DMO) in its 2016 Debt Sustainability Analysis (DSA) report notes that the debt service-to-revenue ratio (external and domestic debt service) of the Federal Government of Nigeria (FGN), excluding states and local governments breached the country’s specific threshold of 28 percent. However, the FGN is taking steps towards debt sustainability by diversifying its debt profile through the issuance of the FGN Savings Bond, Diaspora Bond and Sukuk.
Additionally, the DMO disclosed that the FGN plans to refinance domestic debt, particularly the high-cost Nigerian Treasury Bills (NTB) by issuing $3 billion in foreign debt of longer tenor. The planned refinancing is in line with the debt management strategy of the FGN for 2016-2019, with the overall objective of reducing its total cost of borrowing to achieve the country’s strategic target of an optimal debt mix of 60 percent and 40 percent for domestic and external debts, respectively. Our analysis of the data from the DMO as at June 2017 shows that Nigeria’s total debt stock stood at 19.64 trillion naira, representing an increase of 13.12 percent from the December 2016 figure of 17.36 trillion naira.
A breakdown of the debt stock shows that external debt accounted for 23.44 percent (4.60 trn naira), while domestic debt stock accounted for 76.56 percent (15.03 trn naira). If the DMO were to move the external debt position as at June 2017 to the planned optimal level of 40 percent, it means that it would have to refinance 3.25 trillion naira of the local debt in favour of the external debt. Looking at the FGN’s debt structure, the domestic debt component stood at 12.03 trillion as at June 2017. NTB, which is the short-term debt, accounted for 30.77 percent or 3.70 trillion naira of the domestic debt of the FGN.
This is higher than the target of 25 percent under the debt management strategy. Consequently, the FGN is likely to replace the short-term debt with long-term debt to achieve its debt structure target. The planned restructuring of the debt stock of the FGN will result in a reduction in the average weighted cost of borrowing.
This reduction in the cost of borrowing will be as a result of lower interest rates in the international market and a reduction in the holdings of high-cost NTBs. The average yield on the 364-Day NTB from January to September 20, 2017, 22.50 percent compared with the average yield on the FGN 6.375 percent July 2023 Eurobond of 5.85 percent.
Following the FSDH Research report issued on August 28, 2017 titled “A Drop in the Nigerian Treasury Bills Yield Imminent” the yield on the 364-Day NTB dropped from 22.72 percent on August 30, 2017, to 20.47 percent on September 21, 2017. The yield on the FGN Bond has also dropped in the market. The total amount of domestic debt service in 2016 stood at 1.20 trillion and represents 58 percent of the federal allocation disbursed to the FGN. As at June 2017, the total domestic debt service stood at 684.45 billion, representing 62 percent of the total FGN allocation of 1.10 trillion for the period.
This represents an improvement from total domestic debt service as at March 2017, which stood at 449 billion naira representing 82 percent of the total FGN allocation for the period. We note that FGN revenue has been challenged in the last two years on account of the drop in oil revenue. Furthermore, the fact that a significant part of government revenue goes towards interest payments means that little revenue is left for the government to undertake capital projects. The FGN needs to improve critical infrastructure in the country to increase the competitiveness of the economy to attract investments and maintain economic growth.
This effort coupled with the current tax reform of the FGN, will increase revenue accrued to the government and improve the debt service-to-revenue ratio. As the yields on the FGN securities continue to drop there will be opportunities for more activities in the corporate bond market.
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