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Rising Debt Servicing Cost Can Impede Growth – CBN

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2 years ago

July 4, 2022

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The Central Bank of Nigeria has expressed concern over the rising cost of debt service being incurred by the Federal Government.

The CBN, in its half-year 2020 economic report, said the trajectory of Federal Government’s debt further constrained fiscal policy during the period, as interest payment obligations amounted to N1.15tn in the first half of 2020.

“This suggested that, despite the subsisting revenue challenge, which was exacerbated by COVID-19, the larger proportion of FGN revenue was devoted to debt service,” it said.It said at 19.2 per cent, the debt-to-GDP ratio indicated a solvency position of the government.

“However, the rising cost of debt service underscores a precarious liquidity position that could impair the government’s fiscal space, as well as its growth objectives,” the central bank said.

It said total public debt outstanding was driven by rising fiscal deficits and associated borrowings, induced by low revenue inflow in the face of relatively high expenditure.

It noted that total public debt, constituting both the federal and state governments’ external and domestic debt, in the first half of 2020, stood at N31.01tn or 22.3 per cent of GDP, a sizeable increase of 20.6 per cent over its level at the end of June 2019.

The CBN said the increase was attributed to the receipt of budget support loan from the International Monetary Fund and new domestic borrowing to finance the revised 2020 Appropriation Act.

According to the report, the Federal Government owed 81.5 per cent of the total outstanding debt, while state governments accounted for the balance of 18.5 per cent.

“Regardless, given that the FGN guarantees external borrowing by states in line with section 47 (3) of the Fiscal Responsibility Act, 2007, the latter’s share of external debt (13.5 per cent of total external debt) was a contingent liability to the FGN,” it said.

The CBN said in the first half of 2020, domestic debt comprised 57.6 per cent of the total, while external debt accounted for the balance of 42.4 per cent.