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The banqueting hall of the Oriental Hotel in Lagos buzzed with anticipation. A few days after Nigeria’s new president took office in late May, about 80 of its business elite gathered around tables draped in gold cloth waiting to hear a briefing on what the future might hold.
Bismarck Rewane, a leading Nigerian economist, was clear. Zipping through a deck of slides, he had one message: the new administration had no alternative but to undertake a series of bold economic reforms. Further delay would pitch the country into “freefall”.
“Nigeria is choked,” he said in an interview after his address. “There is a poverty problem, unemployment problem, an oil smuggling problem, an inflation problem, the deficit and all of that. It is like a desperate case lying in the emergency room.”
There was one silver lining. Once tough decisions have been taken and reforms pushed through, there will be an “inflection point”, after which economic growth will bounce back, Rewane predicted.
Among the toughest of Nigeria’s challenges is debt.
So rapid was the build up of foreign and domestic debt under Muhammadu Buhari’s government, which preceded that of incumbent Bola Tinubu, that last year the IMF warned, by 2026, the Nigerian government may be spending 100 per cent of its revenue on servicing the interest payments.
Since Tinubu took office, two of the biggest reforms — the scrapping of a $10bn-a-year petrol subsidy and abandoning a policy of propping up the naira’s value against the US dollar — have been motivated partly to counter debt stress.
Debt markets have broadly welcomed the moves. The fuel subsidy’s demise should swell Nigeria’s hard currency earnings, thus allowing it to more easily meet interest payments on most of its $41.9bn foreign debt — a sizeable chunk of which is in Eurobonds.
“The removal of the fuel subsidy is one of the most significant fiscal reforms Nigeria has seen in years,” says Razia Khan, Africa and Middle East research head at Standard Chartered Bank. “It is an undoubted credit positive, and Eurobond spreads have tightened as a consequence.”
The reforms may also convince market players that Nigeria is serious about tackling its chronic economic frailties. “The strong reform momentum makes it cheaper for Nigeria to borrow again externally, so the fuel subsidy removal helps to bring down financing costs overall,” Khan adds.
The external debt’s composition is varied. The lion’s share is owed to multilateral lenders, including the World Bank, IMF and African Development Bank. Much is on concessional terms, analysts say. Just over $4bn is owed to Chinese lenders, principally the Export-Import Bank of China, analysts add.
Asked whether Nigeria could avoid an overseas debt default, Rewane says: “I think so. First and foremost because you are taking policy decisions, you are more likely to achieve the rescheduling of debt with your creditors. The rescheduling of debt means that you avoid default.”
But some non-sovereign debtors could have a tougher time making hard currency debt repayments as the value of their naira earnings decline with the Nigerian currency’s nosedive. Early this year, Fitch Ratings said most Nigerian banks have sufficient capital buffers to withstand a significant naira depreciation. In June, however, it placed local lender Coronation Bank Limited on watch for a potential downgrade.
The outlook for domestic debt, which totalled N27.55tn at the end of last year, may be manageable, says Khan: “Despite the anticipated rise in inflation as a result of the fuel subsidy removal, yields on Nigerian local currency bonds are still negative in real terms.” This helps “to inflate away the accumulated stock of local currency debt so far, making it less of a hurdle for Nigeria”.
Jason Tuvey at Capital Economics says the naira’s devaluation will add to inflationary pressures, though, which already had reached 22.2 per cent in April, a 17-year high.
If, as Tuvey expects, inflation rises significantly further, the central bank will be obliged to raise interest rates sharply from a current 18.5 per cent. Tuvey sees Nigeria’s key interest rate rising to 21.5 per cent by the end of the year, but adds that the risks are towards a larger increase.
This may presage turbulence for Nigeria’s credit market and for its economy. More optimistic observers, however, say Tinubu’s policies should put expectations for future growth on a firmer footing. In turn, this could attract more foreign direct investment, thus rehabilitating the balance of payments and allowing the government to service its foreign debt more comfortably.
