Afreximbank, Africa’s leading export-import bank, has issued a stark warning about Nigeria’s financial future, predicting that the country’s debt service to revenue ratio could reach a staggering 110.4% in 2024.
This dire forecast highlights the escalating fiscal challenges that Nigeria faces as it grapples with economic instability and mounting debts.
In its latest country report, Afreximbank traced the alarming rise in Nigeria’s debt service to revenue ratio from 33.8% in 2017 to the projected 110.4% for 2024. This steep increase signals potential difficulties for Nigeria in meeting its debt servicing obligations, given its current revenue generation capacity.
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Earlier this year, BusinessDay reported that Africa’s largest economy spent 66.9% (N5.79 trillion) of its total revenue of N8.65 trillion on debt servicing in the first nine months of the year. While this figure is lower than the 99.3% (N4.23 trillion) recorded in the same period of 2022, it underscores the persistent fiscal strain Nigeria faces.
Despite the gloomy outlook for 2024, the bank suggests that continuous structural reforms and improved fiscal management could reduce the debt service to revenue ratio to 62.6% by 2025.
Afreximbank stated, “The debt service to revenue ratio has increased significantly, from 33.8% in 2017 to a projected 110.4% in 2024, signalling potential difficulties in meeting debt servicing obligations relative to revenue generation.”
The report further noted that in terms of foreign exchange (FX) debt, Nigeria is experiencing a relatively low FX debt-to-GDP ratio, which has surged from 16.7% in 2017 to a projected 40.3% in 2024.
However, the debt-to-export ratio, which peaked at 235.7% in 2020, is expected to decline to 137.1% by 2025. This high ratio indicates Nigeria’s heavy reliance on external borrowing compared to its export earnings, highlighting the need for more balanced economic strategies.
“The debt-to-export ratio has also shown a substantial increase, reaching 235.7% in 2020 before gradually declining. It is projected to decrease to 137.1% in 2025, suggesting a heavy reliance on external borrowing compared to export earnings,” Afreximbank noted.
The report also highlights Nigeria’s debt service to export ratio, which has fluctuated over the years, reaching 18.4% in 2023. This ratio measures the proportion of exports required to service debt obligations, underscoring Nigeria’s dependence on its export sector to manage its debt burden.
Despite these challenges, Afreximbank’s report offers a cautiously optimistic view of Nigeria’s ability to sustain its debt. The bank emphasizes the importance of diversifying funding sources and enhancing revenue generation to mitigate risks associated with rising debt levels.
“The country needs to find diverse funding sources and increase its revenue to minimize risks associated with rising debt levels and debt service obligations compared to GDP, exports, and revenue,” the report emphasized.
It further noted that to address these fiscal challenges, Nigeria needs to implement effective measures to enhance its tax collection systems. Additionally, the bank said that addressing the pervasive issue of oil theft is crucial to safeguarding one of Nigeria’s critical revenue streams, noting also the need for reducing non-productive government spending will also free up resources that can be redirected towards debt servicing.
“Enhancing tax collection systems, curbing oil theft, cutting non-productive government spending, and supporting private sector-led growth can ease debt sustainability pressures and promote long-term economic stability,” Afreximbank said.
The lender noted that supporting private sector-led growth by promoting private sector initiatives can drive economic expansion and increase revenue, providing the government with the financial flexibility needed to manage its debt more effectively.
The report highlighted securing debt management frameworks, improving transparency and accountability in debt procurement and use, and establishing sustainable debt repayment plans as crucial to protecting Nigeria’s fiscal health and reducing risks linked with mounting debt levels and debt service obligations.
Finance Minister Wale Edun recently highlighted significant improvements in Nigeria’s revenue-to-debt service ratio, which he said has declined from 97% in 2023 to 68% in 2024. This reduction suggests a decreasing debt burden and an overall improvement in the country’s fiscal health.
The Minister attributed this positive trend to enhanced revenue collection efforts and measures to curtail systemic leakages. Notably, Nigeria has ceased relying on ways and means advances from the Central Bank to fund its fiscal obligations, marking a pivotal step towards more sustainable economic governance.
“The country’s debt service to export ratio has varied over the years, reaching 18.4% in 2023, which indicates the proportion of exports needed to service debt obligations. Despite facing challenges stemming from the government’s various reforms, Nigeria’s ability to sustain its debt looks promising,” the report added.