Foreign investors are worried about the low level of government revenue in Nigeria and the implication for the country’s ability to service its debt.
Chief Economist, Africa and Middle East for Standard Chartered Bank Group, Razia Khan, disclosed this Lagos during a presentation titled: “Nigeria 2020-Economic Outlook.”
She noted that while recent measures by the Federal Government to raise revenue such as the increase in Value Added Tax (VAT) is a step in the right direction, foreign investors are more concerned about the effectiveness of the measures in raising revenues.
Stressing that foreign investors are not fixated about the size of Nigeria’s debt stock but on level of government revenue, Khan said that Nigeria must achieve significant growth in revenue otherwise the investors will demand higher returns on loans to the country.
She stated: “It is very clear from the concerns outlined by Fitch and Moody’s last year that one thing that Nigeria will have to do in a big way is revenue mobilisation. Nigeria’s problem is a revenue problem, until you don’t do anything on revenue, then everyone focuses on debt.
“A very key metric everyone needs to pay attention to is the revenue to debt service ratio. We think the fiscal authorities are already reacting to this. They have already outlined their intention to seek more concessionary sources of financing wherever they are available.
So I think there is this realization at the finance and budget ministry level that the way to keep on borrowing to be able to drive spending intent is not unlimited and that Nigeria needs to show an immediate difference in controlling the near term cost of debt service and especially in terms of ramping up the revenue.
“So it is not that they can do one part of that equation without looking at the other. You have to do both at the same time. This is because if there is no revenue growth, then even the amount of credit that creditors are previously willing to lend or investors are previously willing to put into the debt market, there will be a demand for higher returns if the risks are higher because revenue growth is just not there.”
Expressing the concerns of foreign investors over recent measures to raise government revenue, including the ongoing closure of the land border, vis-a-vis the minimum wage increase, Khan said: “We have seen some announcements of minimum wage increase. It is clear that something needs to be done to address the challenges that will be created to state government finances.
“The VAT increase is the obvious solution but it was not obvious at the time that it was going to be implemented. Even though some will argue that 7.5% is not really that high, it is still way below the regional peers, but it is a step in the right direction and if tax compliance be tightened at the same time, this will ultimately be positive.”