Nigeria’s debt burden continued to weigh heavily on its finances in the third quarter of 2024, with total debt service costs, encompassing both external and domestic obligations, reaching N3.57 trillion. This figure represents a 1.71% increase compared to the N3.51 trillion recorded in the second quarter of the same year. The rise was primarily fueled by the dual pressures of increased external debt service payments, exacerbated by the depreciation of the naira against the US dollar.
The weakening of the naira played a significant role in escalating the cost of servicing external debt. While external debt service stood at $1.12 billion in Q2, equivalent to N1.65 trillion at the then prevailing exchange rate of N1,470.19/$, it rose to $1.34 billion in Q3, translating to a much higher N2.14 trillion due to the depreciated exchange rate of N1,601.03/$. This represents a substantial 29.70% increase in naira terms, highlighting the vulnerability of Nigeria’s debt servicing costs to exchange rate fluctuations. Even in dollar terms, external debt service saw a considerable increase of 19.44%.
A deeper examination of the components of external debt service reveals the specific drivers of this increase. Multilateral debt service, comprising payments to institutions like the International Monetary Fund (IMF), remained the largest component, reaching $712.66 million in Q3, a slight increase from the previous quarter. Bilateral debt service, on the other hand, witnessed a dramatic surge of 325.52%, reaching $186.92 million. This significant jump was primarily attributed to a large payment to China’s Exim Bank, highlighting the growing importance of China as a creditor to Nigeria. Commercial debt service, including Eurobonds and other syndicated loans, also saw an increase, reaching $438.68 million, largely driven by interest payments on Eurobonds.
In contrast to the rising external debt service burden, domestic debt service costs experienced a decline in Q3, falling to N1.43 trillion from N1.86 trillion in the previous quarter. This decrease was primarily driven by a reduction in Federal Government bond interest payments, which fell from N1.68 trillion in Q2 to N1.25 trillion in Q3. Despite this decline, bonds continued to dominate the domestic debt service portfolio, accounting for the lion’s share of domestic debt payments. However, interest payments on Nigerian Treasury Bills (NTBs) increased significantly, rising to N168.53 billion from N107.48 billion, indicating a growing reliance on short-term borrowing to finance government operations.
Other components of domestic debt service remained relatively stable. Payments on FGN Sukuk bonds, designed to comply with Islamic finance principles, amounted to N8.28 billion. Interest payments on Federal Government savings bonds, aimed at retail investors, totalled N1.83 billion. Notably, there were no recorded principal repayments on promissory notes or other similar debt instruments during Q3.
The rising debt service costs, particularly on the external front, are raising serious concerns among economic analysts regarding the sustainability of Nigeria’s debt trajectory. The significant portion of government revenue consumed by these payments leaves limited resources for crucial investments in infrastructure, education, healthcare, and other vital sectors critical for economic development and social well-being. This situation underscores the urgent need for Nigeria to implement strategies to boost revenue generation, diversify its economy away from reliance on volatile oil revenues, and adopt more prudent fiscal management practices to address the growing debt burden and ensure long-term economic stability. The increasing reliance on short-term borrowing through NTBs also highlights the potential risks associated with managing short-term liquidity while addressing the larger issue of long-term debt sustainability. The situation calls for a comprehensive review of debt management strategies, including exploring options for debt restructuring and prioritizing concessional financing to mitigate risks and ensure fiscal sustainability.
