The high and expanding cost of debt service on bonds and other debt securities issued by the Federal Government is whittling down the national budget, diverting financial resources away from spending on urgently needed capital projects.
A breakdown of the fiscal year 2015 budget approved by the Senate this week shows that debt service provisioning for the fiscal year was put at N953.6 billion, representing about 21.2 percent of the government’s projected total expenditure of N4.493 trillion.
Year-on-year, this represents an increase of nearly 34 percent from what was earmarked in fiscal year 2014 for debt servicing.
A breakdown of the approved budget numbers shows that, of the N953.6 billion earmarked for debt servicing, N894.6 billion will be used to service government’s domestic debt while the remainder will go to servicing external debt.
Further analysis of the numbers indicates that the government plans to spend N396.6 billion more on servicing its debts than it plans to spend on capital projects.
Analysts note that given the massive infrastructure deficit in the country, such a high debt service liability will, in addition to bringing little direct value to the people, have a long term impact on government’s fiscal sustainability.
“This (high cost of debt servicing) will continue to be a sting in the tail for the government in coming years,” analysts at Investment Banking firm, Afrinvest noted at the weekend.
The analysts were however optimistic that the commitment of the incoming administration of Muhammadu Buhari to plug revenue leakages and pursue a lean government will lessen the fiscal headwinds that have built over the past years.
They said: “Although we believe the execution of the 2015 budget may pose a challenge for the incoming administration, we believe savings from the various leakages and cost reduction may go a long way in supporting successful implementation of the 2015 budget.”
In recent years, lower oil receipts resulting from opaque oil accounts, weaker oil prices, large scale oil theft and other disruptions in oil production have prompted the government to increase borrowing to meet the revenue shortfall.
For instance, the N970 billion deficit built into the 2014 budget (based on an oil benchmark of $77.5 a barrel) was financed partly with about N950 billion raised from bond issuance programmes in 2014.
Based on the Debt Management Office’s (DMO) Bond Issuance Calendar for 2015, the government may have raised up to N305 billion in the first quarter of 2015 alone through bond sales.
For the second and fourth quarters, it expects to raise up to N245 billion and N285 billion respectively from bond issuance programmes in order to part finance the projected fiscal deficit of N1.075 trillion that has been built into the approved fiscal year 2015 budget, based on an oil benchmark of $53 a barrel.
As oil prices, which account for up to 75 percent of government’s budgetary revenues, are lower coupled with a devalued naira, investors have demanded higher yields on government debt securities (up to 19.97 percent) in recent months.
Higher yields translate to higher debt servicing costs.
“It is more like using one debt to pay for another,” said one analyst.
