Nigeria to Pay States’ Bondholders Despite Debt Deferral

Further states’ debt deferrals subject to restructuring plan
Tumbling oil prices pushed revenue to five-year low in March

Nigeria’s federal government said it will help pay states’ creditors, including bondholders, despite the finance ministry’s announcement last week that it will defer their debt obligations for the month of March as the regions struggle to pay civil servants.

“Debt repayments due to states’ creditors will be fully paid notwithstanding the deferral,” the ministry said in an e-mailed statement on Monday. “All creditors, including bondholders, will not be adversely impacted.”

Nigeria, Africa’s largest economy and oil producer, has been hammered by tumbling oil prices. Economic growth slowed to 2.8 percent in 2015, the lowest since 1999. The International Monetary Fund forecasts growth in 2016 might recede to 2.3 percent. The nation’s revenue fell to five year low in March, shrinking disbursements to its 36 states, and making it difficult for them to pay government salaries.
To assist the lower-tier governments, the finance ministry waived 10.9 billion naira ($54.8 million) of loan repayments for March.

“Further deferrals will be subject to the agreement of a fiscal restructuring plan to be prepared by each state with clear measurable objectives,” according to the finance ministry.

Nigeria had debt amounting to $10.7 billion as of Dec. 31, of which the states held $3.67 billion, according to data from the country’s Debt Management Office.

At 299 billion naira, government revenue was the lowest in five years in March, which poses a challenge to funding President Muhammadu Buhari’s record 6.1 trillion-naira budget he needs to stimulate growth.
Nigeria may need to significantly increase borrowing to fund its budget and is in discussion with China, the World Bank and the African Development Bank, in addition to planning a number of renminbi-denominated bonds.

Although Nigeria’s debt ratios are low compared to peers like Ghana, borrowing for government spending at this level may be “unsustainable,” according to London-based BMI Research.

The government’s plan to widen the tax base and accelerate non-oil revenue to 87 percent this year is unlikely given the “economy is floundering and capital controls” such as pegging the naira at 197-199 per dollar, “are stifling production,” according to BMI.

“We expect that Nigerian government revenues will remain low through the course of 2016 and into 2017, due to a heavy reliance on the proceeds of oil sales,” BMI said.

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