Nigeria allocates N2.9tn for debt servicing

Nigeria recently signed its official budget for the year 2020, finally putting an end to the uncertainty surrounding the country's financial plans for the year. The budget, initially submitted at 10.5 trillion Naira, was eventually adjusted to 10.81 trillion Naira by the Nigerian parliament. One key adjustment made was the increase in the benchmark rate from $25 per barrel to $28 per barrel, reflecting a more realistic view of the global oil market. Deepbo Ajayi, the head of fixed income and forex at Chapel Hill Denham, noted that the benchmark rate adjustment was necessary, especially given that oil prices have been hovering around $40 per barrel in recent times. This move shows a level of prudence on the part of the Nigerian government in its budget planning. The increased budget allocation will address critical areas such as debt service, with 2.951 trillion Naira earmarked for this purpose. Of this amount, 1.87 trillion Naira is allocated to domestic debt, $805 billion to foreign debt, and $27.900 billion for the sinking fund to retire maturing loans. Ajayi explained that the significant budget deficit of 4.19 trillion Naira, with 2.9 trillion Naira going towards local debt and 1.9 trillion Naira for foreign debt, is largely due to the impact of the global pandemic. Countries around the world, including Nigeria, are facing economic challenges due to the COVID-19 crisis, leading to increased borrowing to sustain operations and mitigate the impact on the economy. However, Ajayi raised concerns about Nigeria's rising debt levels, with the debt to GDP ratio approaching 65% and the cost of debt to revenue reaching 99%. These figures signify a potential fiscal crisis if revenue generation is not urgently addressed. The government must focus on growing revenue streams to effectively service its debt and prevent a looming financial crisis. Failure to do so could lead to severe economic repercussions, as hinted by recent warnings of a possible bankruptcy scenario. It is crucial for Nigeria to adopt prudent financial management strategies to navigate these challenging times and ensure sustainable economic growth in the long run.