Reactions Trail Huge Debt Service, As Naira Depreciation Shoots Up Nigeria’s Foreign Debt by N8.72tn

Reactions from some industry players in the financial sector have trailed Nigeria’s huge debt service caused by the depreciation of the Naira in the period of seven years since 2015.

Naija News reports that experts in the industry have expressed worry about how the depreciation of the Naira over the years under review would impose a huge debt service on the economy, particularly at a period when there is low oil revenue due to low sales.

The reaction is against the backdrop that the value of the Naira to dollar fell from N196.92 in June 2015 to N414.72 in June 2022, worsening Nigeria’s foreign debt burden.

The depreciation indicates that within the seven years under review, the naira depreciated by 52.52% against the US dollar.

Naija News understands that a document obtained from the website of the Central Bank of Nigeria(CBN) shows that the monthly average exchange rate of the Naira (Naira Per Unit of Foreign Currency) for 2015 was N196.92 for Inter-bank Foreign Exchange Market.

While the exchange rate for one dollar as of June 30, 2022, was N414.72, according to the figure provided by the CBN.

It would, however, be recalled that recent reports of Nigeria’s total external debt as of June 30, 2022, stood at $40.06 billion from the $10.32 billion recorded during the same period on June 30, 2015.

An indication that there has been an increase of 288.18% in seven years, according to the external debt stock reports by the Debt Management Office.

Information from the Debt Management Office reveals that the Federal Government had an external debt of $7.05 billion, while state governments owed $ 3.27 billion.

But as of 2022, states’ external debt had risen to $4.56 billion, while the Federal Government’s external debt was $35.5 billion.

If the CBN average exchange rate for June 2015 was used to weigh the country’s current $40.06 billion foreign debt, Nigeria’s external debt in Naira terms would have been N7.89 trillion.

However, with the exchange rate of N414.72 as of June 30 this year, the total external debt in Naira terms was N16.61 trillion, showing a difference of N8.72 trillion.

Naija News gathered that the debts include loans from multilateral sources such as the World Bank, the African Development bank and the International Monetary Fund, including those from bilateral sources such as China, France, Japan, Germany and India, while others are debts commercial sources, which include Eurobonds and Diaspora bonds.

Naija News however reports that financial experts who reacted to the differential of N8.72 trillion in the country’s foreign debt due to the depreciation of the Naira noted that Nigeria needs to move away from reliance on foreign assistance to finance developmental projects.

One of the experts, who is the Managing Director/Chief Executive Officer (CEO) of Cowry Asset Management Limited, Johnson Chukwu explained that it will cost Nigeria N8.72 trillion in naira terms if the country decides to pay back the $40.06 billion external debt in 2022, noting that If this same debt was incurred in 2015, Nigeria would have spent N8.72 trillion less, given the then exchange rate of N196.92/$.

He told Punch that “This will impose a huge debt service on the economy, particularly at a period when we have low revenue from oil sales. If the revenue from oil sales does not improve, then the government will be struggling to meet that debt service obligation to foreign lenders.

“Nigeria could service its foreign debt at the current level, but a constant increase in debt without a corresponding increase in foreign currency earnings could put the country in a difficult position.”

Also reacting to the situation was a member of the Monetary Policy Committee (MPC), who pleaded anonymity to say the current situation could be called a naira devaluation, rather than depreciation.

The source pointed out that depreciation is driven by demand and supply, devaluation is often a policy measure employed by the central bank to achieve certain economic outcomes, and in this case, certain demand and supply factors were triggering the devaluation.

The Monetary Policy Committee member told Punch that “The issue of devaluation is a function of demand and supply factors. If the value of a currency is depreciating, it means the demand is more than the supply.

“The country is not exporting enough and foreign investments into the country were dropping.

“If we are having issues with supply, it is either the export is not growing, or foreigners are not investing in the country.

“Our export is mainly oil, but there are issues like sabotage in Niger Delta areas. Our volume has not been increasing as it should, and then subsidy as part of what we earn is also spent on subsidising refined products.

“Also, our non-oil export is not growing, which means that we have not been diversifying the economy sufficiently to move away from oil to non-oil.”

The source advanced that the covid 19 pandemic, insecurity and certain policies contributed to devaluation, adding that “Also, the pandemic has affected remittances, and there has been decreasing capital flow, especially due to insecurity. Foreigners are also not happy with the policies that we practice. There is risk in the system discouraging investors. All of these contribute to the failure of supply.”

Speaking about demand, the source also confided in Punch that the issue of people buying dollars to use as bribes and to keep, among other things, had led to more demand than supply.

“On the demand side, people demand foreign currencies to import raw materials, final products or capital goods. In Nigeria, we also see that the dollar has become the currency that people use to bribe. There are also those who buy dollars to keep them. This makes the growth in demand higher than that of supply, affecting the exchange rate over the year.

“The government needed to restructure the economy, reduce dependence on oil, address the issue of oil subsidy while controlling speculators buying dollars to keep,” the MPC member said.

Meanwhile, financial experts at a workshop on tax expenditure organised recently by the ECOWAS Commission in Abuja urged Nigeria and other West African countries to move away from reliance on foreign assistance to finance developmental projects in the region.

According to the financial experts at the workshop, over-dependence on financial aid and external loans might affect long-term prosperity for the entire region.

The Special Advisor to the Director (Customs Union and Taxation in ECOWAS), Gbenga Falana, maintained that the debt profile of most of the countries in the sub-region was mounting, and there is a need for West African countries to look inwardly and finance local projects through effective domestic resource mobilisation.