The FG’s revenue-boosting drive may slash debt servicing costs by 20% – DMO

Ms. Patience Oniha, the Director-General of the Debt Management Office (DMO), has outlined the Federal government’s initiatives to enhance revenue, aiming to significantly reduce its debt-service ratio by 20% in the medium term.

These strategic measures are expected to lead to a remarkable reduction in the ratio over the next four years, according to Oniha in an interview with Bloomberg. It is essential to note that the following content discusses these efforts in detail, emphasizing the significance of growing revenue, the initiatives President Tinubu has set in motion, Nigeria’s tax-to-GDP ratio, and the nation’s public debt.

In her statement, Ms. Patience Oniha underscored the early commitment of the current administration to revenue growth as a critical priority. She stated, “One of the things that this administration has taken on very early in the day is how to grow revenue. For us, that is very spot on. We need to grow revenue.”

Efforts to Increase Federal Government’s Revenue:

President Tinubu, with a vision to enhance the country’s revenue output, has set an ambitious target of achieving an appreciable 18% of GDP in the coming years. To realize this goal, he has established a fiscal policy and tax committee, which is tasked with streamlining the revenue collection process to make it more effective.

Tax-to-GDP Ratio:

The World Bank estimates Nigeria’s tax-to-GDP ratio at 7%, significantly lower than the average for Africa. On the other hand, the Federal Inland Revenue Service (FIRS) has reported a higher figure, putting it at 10.86%. Regardless of the exact figure, it is clear that Nigeria’s tax-to-GDP ratio is one of the lowest in the world, raising concerns about the country’s ability to generate sufficient revenue for its needs.

Nigeria’s Public Debt:

The DMO has reported that Nigeria’s total public debt stands at N87 trillion. Servicing these loans has been a substantial burden, consuming up to 96% of the country’s revenue as of 2022. This situation has raised alarms regarding the sustainability of Nigeria’s debt profile, especially considering its structure.

Nigeria’s Debt Composition:

Around 60% of Nigeria’s external debt, which was approximately $41 billion as of June, comprises concessional and semi-concessional loans. These loans are relatively low-cost and do not all mature simultaneously. This diversity in debt structure provides a level of flexibility and stability.

Domestic Debt Maturities:

Over 70% of Nigeria’s domestic loans are distributed across various maturities, ranging from three to 30 years. This distribution is made possible through a well-established domestic bond market that enables the government to issue securities. Nigeria also benefits from a substantial investor base and a thriving pension fund industry.

The Role of Concessional Loans:

Concessional and semi-concessional loans play a significant role in Nigeria’s debt profile. These loans typically come with favorable terms, including lower interest rates and extended repayment periods. The fact that they do not all mature at the same time reduces the pressure on the government to meet multiple debt obligations simultaneously.

The Flexibility of Domestic Debt:

The diversity in the maturities of domestic debt instruments allows Nigeria to manage its financial obligations more effectively. Short-term and long-term debt instruments provide the government with the flexibility to adapt to changing economic conditions and to address various fiscal needs.

The Role of the Domestic Bond Market:

Nigeria’s robust domestic bond market serves as a vital platform for raising funds through the issuance of government securities. This market allows the government to attract investments from a wide range of investors, both domestic and international. The government can choose from a variety of bond tenors, enabling it to match its borrowing with the country’s long-term development plans.

Investor Base and Pension Funds:

Nigeria enjoys the advantage of having a substantial investor base, both within the country and among foreign investors. Additionally, the thriving pension fund industry contributes to the stability of the debt market. Pension funds are often major investors in government securities, providing a consistent source of demand for government debt instruments.

In conclusion, Ms. Patience Oniha, the Director-General of the Debt Management Office, has highlighted the Federal government’s determination to bolster revenue in order to reduce the debt-service ratio significantly. The initiatives include setting ambitious revenue targets, establishing a fiscal policy and tax committee, and streamlining the revenue collection process. While Nigeria faces challenges in improving its tax-to-GDP ratio and managing its public debt, the diversity in its debt structure and the strength of its domestic bond market offer valuable tools to ensure financial stability and sustainable debt management.