Nigeria’s External Debt Servicing Rises to $2.78 Billion in First Seven Months of 2024

Nigeria’s external debt servicing costs have surged significantly, reaching $2.78 billion in the first seven months of 2024, marking a 53.63% increase compared to $1.81 billion in the same period in 2023. This increase of $971.47 million was detailed in the Weekly International Payments data released by the Central Bank of Nigeria (CBN).

According to the CBN data, the highest debt servicing amount was recorded in May 2024, with payments totaling $854.36 million. This was followed by $560.51 million in January and $542 million in July. In contrast, the months of February, March, and April saw debt servicing payments remain below $300 million, with the lowest amount recorded in June 2024 at $50.82 million.

In 2023, the highest amount paid for external debt servicing was $641.69 million in July, followed by $400.47 million in March. Other months in 2023 also recorded payments below $300 million, with June 2023 seeing the lowest payment of $54.35 million, a pattern that was observed again in 2024.

Debt servicing constitutes a significant portion of Nigeria’s international payments, as highlighted by the CBN. According to the Debt Management Office (DMO), Nigeria’s total public debt stood at N121.67 trillion ($91.46 billion) as of the end of the first quarter of 2024, up from N97.34 trillion ($108.23 billion) at the end of December 2023. This total includes N65.65 trillion ($46.29 billion) in domestic debt and N56.02 trillion ($42.12 billion) in external debt.

The DMO clarified that the increase in naira terms of N24.33 trillion is often misinterpreted as new borrowing. In reality, it includes new borrowing of N2.81 trillion as part of the N6.06 trillion domestic borrowing outlined in the 2024 Appropriation Act, N4.90 trillion as part of the securitization of the N7.3 trillion Ways and Means Advances approved by the National Assembly, and the depreciation of the naira from N899.39/$ in Q4 2023 to N1,330.26/$ in Q1 2024.

Tajudeen Ibrahim, Director of Research and Strategy at Chapel Hill Denham, pointed out that the increase in debt servicing costs is partly due to the naira’s devaluation, which has a foreign currency translation impact. He also noted that the actual increase in the debt value, due to new debt acquired both internationally and domestically, contributed to the higher servicing costs.

Experts have warned that Nigeria could fall into a debt trap if it continues to borrow at high rates. With a low credit rating, the country faces difficulties accessing cheaper funding, which could further escalate debt servicing costs, affecting both recurrent and capital expenditures.

As an alternative, experts suggest that Nigeria should either reduce its borrowing or focus on borrowing for capital expenditures rather than consumption.

In May, Fitch Ratings revised Nigeria’s outlook from stable to positive, affirming its Long-Term Foreign-Currency Issuer Default Rating at ‘B-’. Fitch also projected that Nigeria’s debt servicing costs could reach $4.8 billion in 2024, rising to $5.2 billion in 2025. The government plans to meet these obligations through a combination of multilateral lending, syndicated loans, and potentially commercial borrowing.

Despite the current administration’s focus on domestic borrowing from the capital market, Fitch estimated that approximately 30% of Nigeria’s external reserves are tied up in foreign exchange bank swaps.

In 2023, Nigeria’s external debt servicing payments increased by $1.1 billion to $3.5 billion, consisting of $1.9 billion in market debt payments and $1.6 billion in non-market debt payments. The Federal Government also projected a spending of N8.25 trillion for debt servicing in 2024.

President Bola Tinubu has committed to breaking the cycle of overreliance on borrowing for public spending, which has put considerable strain on government resources due to rising debt servicing costs.

At the subnational level, a July report revealed that 22 states spent N251.79 billion on debt servicing within nine months of assuming office. Despite increased allocations from the Federation Account, these states obtained fresh loans totaling N310.99 billion between July 2023 and March 2024.

In August, Nigeria launched a $500 million domestic FGN US dollar bond under its $2 billion program. This offering, aimed at pension funds, banks, Nigerians at home and abroad, and foreign residents in Nigeria, was expected to boost external reserves and stabilize the naira.

Professor Uche Uwaleke of Nasarawa State University highlighted the bond’s potential to provide a risk-free return for investors, exempt from income tax, and offer a cheaper financing source for the government. He noted that strong demand for the bond could reduce government participation in the naira bond market, freeing up capital for the private sector.

However, economist Marcel Okeke cautioned against the potential dollarization of the Nigerian economy due to the issuance of dollar-denominated local bonds. He warned that this could undermine the naira, leading to a bi-monetary system that could weaken the national currency further.