FSDH Research warns against imminent debt crisis

FSDH Research, an arm of the FSDH Merchant Bank Limited, has advised the Federal Government to urgently implement policies that will grow and diversify the revenue base of the country to avoid an imminent debt crisis.

The firm’s analysis shows that the growth in Nigeria’s debt is higher than the growth in revenue and Nigeria has the lowest government revenue to Gross Domestic Product (GDP) ratio at 6 percnt among some selected countries. 

FSDH Research attributed the sluggish growth in government revenue to Nigeria’s over-dependency on crude oil revenue, combined with volatility in both the price and production of crude oil.

Growing non-oil revenue will require that the Nigerian economic environment has inherent structures that can support business growth. Such structures include adequate physical infrastructure, policies, legal and regulatory frameworks that will make the economy business-friendly to generate taxable profits.

Further analysis of the ratio of the interest payment on domestic debt relative to the FGN allocation from the Federal Account Allocation Committee (FAAC) shows that the FGN is spending too much of its revenue to pay interest on loans.

“This leaves the government with little resources to spend on critical sectors of the economy that could support strong growth and maintain a healthy economy to generate revenue”, analysts at FSDH Research said.

The firm was concerned that current high interest payment relative to revenue may also increase the credit risk of the country.

Although the government has been able to meet its debt obligations (interest and principal payments) so far, if the current situation is not addressed, the interest rate on government loans may increase because of the perceived elevated risk. This would also lead to higher interest rates for private sector operators. It is important to note that the external environment is becoming tighter than before because of the rising interest rate in the US.