Selected Issues


Selected Issues

Assessing the Cost-Risk of Increasing Nigeria’s External Debt1

1. This paper assesses the potential costs and risks of shifting the composition of Nigeria’s public debt from the current ratios of 66 and 34 percent for domestic and external debt to 60:40. A simulation exercise helps assess the cost and risks of this debt management strategy by considering a range of alternative financing strategies (concessional, market-based and pausing external financing). The findings— based on debt-to GDP and interest-to-revenue ratios— indicate that moving to a debt-mix of 60:40 is less costly overall than keeping the current debt mix. Recourse to concessional financing is the cheapest option at both shorter and longer horizons. While increasing the external debt share is the authorities’ preferred strategy, there is a tradeoff involved in terms of vulnerability because greater recourse to international markets over the longer run could be the riskiest strategy as illustrated by a rising debt service to reserves ratio in the case of outlier shocks such as an extreme depreciation of the currency.

A. Background

2. Nigeria’s public debt2 has increased by 6 percentage points of GDP between 2015 and 2018 with the share of external debt rising from just below 20 percent to 34 percent over the same period. While highly concessional multilateral loans traditionally account for the largest share of the external debt portfolio, the increase in Eurobond issuances in the recent past has significantly changed the composition of external debt. The two major multilateral creditors of Nigeria are the International Development association (IDA) and the African Development Fund (ADF). Total loans from these two institutions accounted for about two thirds of the external debt portfolio in 2015. China is the main bilateral creditor, with total bilateral debt in 2015 amounting to 15 percent of total external debt. However, with the issuances of the past 2 years, Eurobonds now account for 55 percent of external debt compared to 14 percent in 2015 while the shares of multilateral and bilateral debt have fallen to 39 percent and 6 percent respectively.


FGN Debt 2015–18

(Billions of Naira)

Citation: IMF Staff Country Reports 2019, 093; 10.5089/9781498306225.002.A003

Sources: Nigerian authorities and IMF staff calculations.

Composition of External Debt 2015-18

(Percent of total)

Citation: IMF Staff Country Reports 2019, 093; 10.5089/9781498306225.002.A003

Sources: Nigerian authorities and IMF staff calculations.

3. There are a number of different sources of risk to the existing debt stock.

  • Refinancing risk is relatively high for domestic debt and low but increasing for external debt. The average time to maturity (ATM) for domestic debt is 7.2 years due to the significant share of T-bills in the domestic debt portfolio. The redemption profile for external debt shows that about 1.25 percent of total external debt will mature within the year rising to 8.5 percent by 2027 when a number of Eurobond maturities fall due. ATM for external debt is 12.3 years.

  • Exposure to interest rate risk is high for domestic debt and rising for external debt. The average time to refixing (ATR) on domestic debt is 5.4 years while on external debt, it is 12 years. While this level of exposure for external debt is relatively low, it is nonetheless increasing in response to the decline in the share of concessional debt.

  • Exchange rate risk exposure is increasing in line with the rising level of external debt currently estimated at 34 percent of total debt. Recent recourse to Eurobond financing (now accounting for 55 percent of external debt) has added considerably to this exposure. In terms of currency risk, exposure is principally to the US dollar (taking account also of its weight in the composition of the SDR (42 percent).


Redemption Profile for 2018 Existing Debt

(Millions of Naira)

Citation: IMF Staff Country Reports 2019, 093; 10.5089/9781498306225.002.A003

Sources: Nigerian authorities, IMF Staff calculations.

4. The authorities’ Medium-Term Debt Management Strategy (MTDS) aims to increase the share of external debt. The authorities’ decision to increase the share of external debt from 20 percent in 2015 to 40 percent in 2019 has been motivated by a desire to avail of lower external interest rates, particularly through loans from multilateral and bilateral creditors, and to take advantage of longer maturities and grace periods. This would allow them to contain the increase in the interest-to-FG revenue ratio, a major vulnerability for Nigeria in terms of fiscal sustainability.3 As of 2018, the share of external debt has reached 34 percent, mostly as a result of regular Eurobond issuance, totaling $10 billion since 2017. This has led to considerably less net domestic issuance in 2018 with treasury bills issuances falling to N3,335 billion from N4,442 billion in 2017 and bonds to N992 billion from N1,521 billion. With only $2.5 billion external funding expected in 2019, the authorities are expected to fall short of their objective, at best only reaching the 60:40 target mix in 2022.


Share of External Debt in Total


Citation: IMF Staff Country Reports 2019, 093; 10.5089/9781498306225.002.A003

Sources: Nigerian authorities, IMF Staff calculations.

5. In view of the extensive ongoing debate about Nigeria’s increasing recourse to non-concessional external borrowing, the analysis here assesses whether the MTDS debt mix objective remains appropriate. To do this, scenario analysis was conducted using the MTDS Analytical Tool which considered various shocks. The baseline assumed that Nigeria would have to borrow on average about $10.5 billion a year externally from 2019–22 under different borrowing strategies, rising to an average of just above $16 billion for the period 2019–28. While the authorities will continue to maximize borrowing from existing concessional financing sources, particularly the International Development Association (IDA) and bilateral partners, the secular decline in the share of concessional lending is projected to continue. The implication is that the appetite for Nigerian Eurobonds shown by investors in the past two years will be sufficient to maintain a growing interest in the medium term without requiring an additional risk premium. Contingency plans to identify other sources of financing may however need to be prepared taking into account the possibility that this volume of external funding does not materialize.


External Financing

(Millions USD)

Citation: IMF Staff Country Reports 2019, 093; 10.5089/9781498306225.002.A003

Sources: Nigerian authorities, IMF Staff calculations

B. Macroeconomic Assumptions

6. The analysis is based broadly on staff’s current macroeconomic projections. This implies that real GDP will grow by 2–2.5 percent over the medium term, and that inflation will remain in double digits while the primary fiscal deficit will average around 2 percent of GDP reflecting relatively low oil prices. As regards the external account, the current account balance is projected to remain close to zero with international reserves declining from their current level to reach $33–34 billion in the medium term. On the basis of the authorities’ established policy aiming at maintaining stability vis-à-vis the US dollar, the naira exchange rate is assumed to be at 325 N/$, slightly below the retail rate, throughout the analysis (except in the case of exchange rate shocks). The tightening of financing conditions at international level is reflected in the assumption that Eurobond interest rates will increase in the short term, with significant and persistent differentials between domestic and external interest rates and within the latter category, between Eurobond and concessional rates (text chart).


Interest Rate Assumptions 2018–24

Citation: IMF Staff Country Reports 2019, 093; 10.5089/9781498306225.002.A003

C. Methodology

7. Four strategies that would help assess the feasibility and desirability of increasing external debt were identified (See Annex 1 for details on methodology and assumptions):

  • Strategy 1 (S1): Assumes future external financing starting in 2020 is on concessional terms, as stated in the Debt Management Office (DMO)’s original 2015–19 debt strategy.

  • Strategy 2 (S2): Assumes market-based financing in 2019–2022 (i.e., Eurobond financing) to reach the composition target of 40 percent external debt by 2022.

  • Strategy 3 (S3): As (S2) but market-based financing is achieved at higher risk premium (i.e., the cost of borrowing is 500 basis points higher than in S2), equivalent to two standard deviations from LIBOR.

  • Strategy 4 (S4): No further external financing apart from that assumed for 2019. All financing raised domestically at prevailing interest rates.

8. The four strategies were subjected to interest and exchange rate shocks in a total of 5 scenarios for each strategy:

  • Baseline (no shock to either interest or exchange rates).

  • Mild interest rate shock, implying an increase of 2.5 percentage points in interest rates. The calibration of this shock is based on one historical standard deviation for LIBOR (capturing the peak in 2007).

  • Extreme interest rate shock implying an increase of 5 percentage points in interest rates, calibrated as double the increase for the mild interest rate shock. Under S3, this is an outlier shock, equivalent to 4 standard deviations from LIBOR.

  • Extreme exchange rate shock implying that the naira depreciates by 100 percent in 2019 for the 4Y exercise (and in 2023 in the 10Y case) and remains at this level. The exchange rate shock is an outlier shock based on the depreciation of the Naira following the 2015 oil price shock. The historical data also suggests that the value of the naira is very sensitive to the movement in oil prices, with the previous marked decline in 2009 (about half of that occurring in 2016) taking place contemporaneously with a sharp drop in oil prices.

  • Combined mild interest and moderate exchange rate shock (a naira depreciation rate of 50 percent, less severe than the recent depreciation), reflecting the reality that market uncertainties surrounding exchange rates often result in correspondingly higher domestic and external interest rates.

9. The analysis is carried out in two assessments covering a four-year (4Y) period to 2022 and a ten-year (10Y) period to 2028. Extending the analysis to the longer time period is important from the perspective of assessing the effect of currency depreciation over a long-term horizon on Eurobonds which the authorities’ financing policies have been heavily reliant upon since 2017. All Eurobonds have a maturity of 10 years or longer, with the exception of a single Diaspora bond of $300 million. Extending the strategy period to 10 years helps assess the long-term exchange rate risk, assuming that the authorities choose to maintain the 60:40 ratio through 2028. However, there is naturally greater uncertainty over all variables when running a scenario over a significantly longer period, so the results need to be interpreted with caution.

10. The overall effect of the strategy is directly impacted by:

  • Composition of Existing Debt: Domestic debt still accounts for two thirds of overall debt.

  • Concessional Financing: A large share of existing external debt is on concessional terms (almost 45 percent at end-2018), which creates an important base effect and mitigates the impact of the significant increase in the use of market instruments since 2017.

  • Use of Eurobonds to reach the 60:40 Target: longer maturities associated with Eurobond financing confer significant advantages in minimizing near-term refinancing risk and hence reduce the gross external financing need to meet the 60:40 target.4

D. Results of the Analysis

11. The analysis captures the effect of the strategy on key debt portfolio indicators under each of the four alternative strategies (Tables 1 and 2). Under the baseline, all strategies lead to an increase in the debt-to-GDP ratio, but the debt-to-GDP ratio remains around 25 percent of GDP by 2022 or 32 percent by 2028. Given the lower cost of financing, using concessional sources (S1) is the cheapest strategy, reducing interest payments, the debt-to-GDP ratio and reliance on short-term funding (lower refinancing risk). On the other hand, S4 has the lowest share of FX debt as a share of total debt (4 percent by 2028), and therefore the lowest foreign exchange risk. However, it is the costlier strategy in terms of interest payments, debt-to-GDP ratio, and refinancing risk (with debt maturing in one year increasing to 9 and 19 percent of total debt in 2022 and 2028, respectively).

Table 1.

Cost-Risk Indicators under Different Debt Management Strategies (2022)

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Sources: Nigerian authorities, IMF staff calculations
Table 2.

Cost-Risk Indicators under Different Debt Management Strategies (2028)

article image
Sources: Nigerian authorities, IMF staff calculations

12. Figures 1 and 2 illustrate the cost-risk trade-offs for each strategy at the end of the four-year and 10-year horizon: debt as a share of GDP and interest payments as a share of revenue. The horizontal axis in the figures on the left represents the risk of each strategy, defined as the maximum deviation of the cost measure from the baseline scenario experienced under any of the five shock scenarios. In the figures on the right, the maximum deviation of costs from the baseline scenario is added to the projected baseline costs. The analysis implies:

  • The worst cost outcomes in the short run (by 2022) result from the strategy that relies solely on domestic financing (S4). To that extent, the DMO’s emphasis on switching to external financing is borne out in the analysis. This holds particularly for the interest-to-revenue ratio as the debt-to-GDP ratio remains comparable across scenarios.

  • By 2028, S4 still remains the costliest option in terms of interest-to-revenue. It becomes unsustainable under stress tests, reaching 200 percent. However, based on the debt-to-GDP indicators, the stress tests results show that the highest increase is for the strategy where external financing is only available at a market premium, albeit with the debt-to-GDP ratio remaining below 45 percent of GDP (almost matched by the strategy relying on domestic financing).

  • Exchange rate risk also matters to the results. The impact of exchange rate shocks on debt sustainability as measured by the debt/GDP ratio is the highest of all shocks with an increase of 4 points relative to the baseline occurring in the 4Y case and about 7 points in the 10Y exercise under all strategies (indicated by the margin of the maximum risk results, lower panels, Figures 1 and 2).

Figure 1.
Figure 1.

Cost-Risk Representation of Different Borrowing Strategies, 2022

Citation: IMF Staff Country Reports 2019, 093; 10.5089/9781498306225.002.A003

Figure 2.
Figure 2.

Cost-Risk Representation of Different Borrowing Strategies, 2028

Citation: IMF Staff Country Reports 2019, 093; 10.5089/9781498306225.002.A003

13. The results above clearly underscore the importance of improved domestic revenue mobilization. An additional simulation analysis based on an assumption of an increase of 0.5 percent of GDP per year in revenue mobilization relative to the baseline from 2019–22 and maintained thereafter would bring the interest-to-revenue ratio down by more than half by end-2022 under all strategies, reflecting the cumulative impact of lower financing needs and an increase of 2 percent of GDP in revenues.


Interest to Revenue Ratio 2022 (Increased DRM)

Citation: IMF Staff Country Reports 2019, 093; 10.5089/9781498306225.002.A003

Sources: Nigerian authorities and IMF staff calculations

14. To bring out the cost-risk tradeoffs between S4 and the other strategies, FX debt (short-term debt and debt service) to reserves ratios also need to be considered. These FX ratios are already relatively high in the baseline for strategies S2 and S3 and would deteriorate in the case of an exchange rate depreciation consistent with maintaining a constant real exchange rate. Consideration also needs to be given to the implications for the balance of payments should the scale of government external borrowing assumed here impact the risk appetite of international investors and result in reduced private sector external borrowing. In addition, the external risks are likely to be correlated with fiscal risks: a plausible scenario involves a fall in the oil price, larger financing needs, lower international reserves, and substantial depreciation.

15. Results for the external debt service to international reserves ratio highlight the extent of vulnerability to exchange rate risk (Figures 3 and 4). The results of the analysis indicate that the high interest rate premium under S3 significantly increases vulnerability relative to other strategies in this respect. In the 10Y case, this ratio would reach almost 50 percent under S3 in the baseline unless international reserves were to increase significantly. However, this would increase to almost 65 percent under an exchange rate shock and 68 percent under an extreme interest rate shock. The importance of concessional financing to the outcome is borne out in the contrast with the results of S1 which show the ratio reaching 12.9 percent in the baseline and 23.3 percent in the case of an extreme exchange rate shock. Interestingly in this case, S4 (domestic financing) is the less risky under all scenarios.

Figure 3.
Figure 3.

Measures of External Debt Vulnerability 2022

Citation: IMF Staff Country Reports 2019, 093; 10.5089/9781498306225.002.A003

Sources: Nigerian authorities and IMF staff calculations.
Figure 4.
Figure 4.

Measures of External Debt Vulnerability 2028

Citation: IMF Staff Country Reports 2019, 093; 10.5089/9781498306225.002.A003

Sources: Nigerian authorities and IMF staff calculations.

16. A number of caveats apply to the analysis conducted:

  • Primary deficit. The baseline scenario assumes a primary deficit of around 2 percent of GDP under current policies throughout the projection period. It could deteriorate if oil prices decline more than anticipated or improve if new revenue measures reduce the deficit as illustrated above. In view of the results of the analysis and their implications for debt sustainability, it is important for the authorities to undertake regularly a fiscal sustainability analysis of their debt strategy, including an in-depth assessment of the assumptions driving the primary deficit.

  • Concessional Financing: Even if borrowing on the international capital markets is made at lower interest rates than prevailing domestic rates, it is nevertheless undertaken at a significant premium relative to the terms of the existing concessional loan portfolio. The authorities’ 2015 debt strategy is however based on an assumption of the continued availability of concessional financing, which is one of the main reasons why the 2019 target date for the 40 percent share is not achievable this year.

  • Exchange rate. In line with the authorities’ current stated strategy, the nominal exchange rate is assumed to remain constant (except in the case of specific shock scenarios). Relaxing this assumption would increase vulnerability to exchange rate changes and magnify the impact of exchange rate shocks for the exercise.

  • Riskpremia. Market sentiment could change, and additional risk premia may need to be paid to compensate investors for the risks associated with the country’s increased exchange rate exposure and the potential for capital flight. In terms of the analysis, this would imply that S3 more accurately reflects the authorities’ strategy than S2 and should therefore be used as the basis for comparison with domestic financing options.

  • Maturity structure. Refinancing risk increases in the longer term as a result of Eurobond maturities falling due in 2027.


FGN Primary Deficit 2018–28

(percent of GDP)

Citation: IMF Staff Country Reports 2019, 093; 10.5089/9781498306225.002.A003

E. Conclusions

17. The DMO’s MTDS includes a target of 40 percent for the ratio of external debt to total debt. Significant progress has been made towards achieving the target following the reduction in issuances of domestic government securities. However, meeting it would likely require a few more years than the targeted 2019, and even then, it would require doubling, on an annual basis for the next five years, the considerable level of external financing obtained in 2018.

18. Using a range of alternative financing strategies over a 4-year and 10-year horizon, the analysis shows that a debt-mix of 60:40 is less costly overall than keeping the current debt mix. The results confirm that recourse to external financing (and preferably concessional) financing is the cheapest option, which in this respect is an endorsement the authorities’ preferred strategy. However, this strategy also involves a tradeoff in terms of a higher level of risk than reliance on domestic financing due to the exchange rate risk it embodies, which would under some scenarios put considerable pressure on international reserves. Overall, the strategy aimed at increasing the share of external debt to 40 percent of total debt remains appropriate but will require careful monitoring of the associated exchange rate risk.

19. The key implementation risks to the medium-term debt strategy highlight the importance of revenue mobilization. The underlying primary fiscal deficit is a key factor driving the results, which implies that improving domestic revenue mobilization will be central to the DMO’s prospects of meeting its targets. The analysis shows that the interest payments to revenue ratio could be reduced by more than half by 2022 under all strategies if the authorities were to even partially meet their revenue objectives under the Economic Recovery and Growth Plan. The authorities’ and staff’s emphasis on the importance of substantially increasing non-oil revenues in the medium-term as well as maintaining efforts to secure concessional external financing is thus important in order to mitigate existing risks.

20. One additional caveat from the analysis worth emphasizing is that the current exchange rate path could be more flexible than is currently envisaged. As the analysis of exchange rate shocks emphasized, assuming a baseline that itself incorporates more flexibility would increase the amplitude of the results of the shock scenarios, making a scenario relying on more market financing at a premium even more costly and risky. For this reason, the authorities need on an ongoing basis to carefully monitor the exchange rate risk associated with their debt portfolio as this may become a major source of vulnerability in the event of outlier shocks. While increased exchange rate risk needs to be factored into the options for debt management strategies, the longer maturity structure of Eurobond financing is at the same time an important source of reduced short-term rollover risk.

Annex I. Data Requirements and Assumptions

The following inputs were used for the analysis:

  • The level of the primary deficit remains the same under all strategies and scenarios and is the same as that assumed in staff’s baseline scenario (averaging around 2 percent of GDP),

  • Existing debt: debt service payments (principal and interest payments cash flows) of existing debt remain the same under all strategies and scenarios. The exception would be interest payments of instruments with variable (floating) rate.1 This information is used to calculate cost and risk indicators of the debt portfolio at the start of the analysis period, and over the strategy period including new debt.2

  • Interest and exchange rates enter as exogenous variables. The analysis requires both a baseline scenario and a range of shock scenarios for each variable. These are used to compute the cost and risk of borrowing strategies under different scenarios.

  • The financing mix determines the external-domestic financing mix per annum for each strategy. To facilitate comparison between strategies, external financing was chosen as the operational target, meaning, the amount of external financing was determined to allow the increase in external debt to reach the target of 40 percent by 2022 (and maintained thereafter in 10Y), while financing that was unmet by external financing was assumed to be fully met from domestic market sources.

  • Borrowing strategies determine how future financing needs will be met. Strategies are presented as the proportion of the financing need that will be met through a set of debt instruments. The terms of the different debt instruments are specified to allow the calculation of debt service (principal and interest payment) over the strategy period. The analysis starts by calculating the interest and amortization cash flows associated with alternative strategies in the first year, which is then fed back into calculation of the total gross financing need for the following year, and based on specified strategy for the second year, interest and amortization cash flow are calculated to determine the third- year gross financing need, and so on. This iteration is repeated until the end of the strategy period, 2022 (or 2028). These strategies determine how the composition of the debt portfolio will change over the strategy period, allowing the generation of cost and risk indicators, including the evolution of debt composition between external and domestic debt.

Common assumptions across all strategies are:

  • External financing for year 2018 reflects external disbursements that have already taken place in year 2018, actual Eurobond issuances of $5.4 billion and staff estimates of $1 billion from multilateral and bilateral is applied for strategies including Strategy 4 that assumes no further external financing.

  • Domestic financing composition: borrowing instruments are T-bills and bonds, where the proportion by instrument was also kept the same across strategies. The latter makes results across the four strategies more straightforward as cost-risk results will be driven by external financing composition and not domestic instruments.

Financing instruments are broadly grouped into 3 types:

  • Multilateral and bilateral creditors: Financing terms from multilateral and bilateral partners remain mostly unchanged. They tend to be on concessional or semi-concessional terms: with low interest rates, long maturity and grace periods. In this case, loans with fixed interest rates range from 0.75–2.50 percent, whereas floating rate loans are referenced to US 6 months Libor with margins set at 0.50–1.25 percent (erring on the side of caution the margins were set slightly above the terms for existing debt). Projections for US 6 months LIBOR for years 2019 – 2022 were obtained from Bloomberg.

  • International capital markets: for S2, to reflect current global risk-off sentiment, a margin was added to the weighted average cost of Eurobond issuances for 2018 (7.23 percent) in year 2019 to price them at an average cost of 8 percent. A further 0.5 percent was added per annum until the end of the strategy period. In the case of Strategy 3, where the credit risk premium is assumed to be higher, the cost of issuing Eurobonds was raised by 5 percent compared to S2.

  • Domestic marketable instruments: yields for Treasury bills (15.5 percent) and bonds (16.5 percent) were kept in line with current staff assumptions. For 2018 actual rates were used and for years 2019–2027 domestic yields were derived from US Treasury curve. Applying no arbitration methodology forward rates were derived from UST. Credit spread (based on the spread between Nigeria Eurobond and US Treasury) and exchange rate risk (based on inflation differential between US and NGA) were applied. Actual yields in 2018 were compared with yields derived according to this methodology and the difference was used to revise down the derived forward yields.


  • Debt Management Office, Nigeria (2016). Nigeria’s Debt Management Strategy 2016–2019.

  • Federal Ministry of Budget and National Planning, Nigeria (2018). Medium-Term Expenditure Framework and Fiscal Strategy, 2019–2021.

  • Federal Ministry of Budget and National Planning, Nigeria (2017). Economic Recovery and Growth Plan 2017–2020.

  • Holland, A., M. Saito and M. Tamene (2016). Enhancing the Effectiveness of Monetary Policy in Nigeria. IMF Selected Issues Paper.

  • International Monetary Fund (2017). The Medium-Term Debt Management Strategy – an Assessment of Recent Capacity Building

  • Tamene, Miriam (2018). Factors that Determine the Nigerian Term Structure of Interest Rates. IMF Selected Issues Paper.

  • World Bank and IMF (2016). Nigeria – Medium-Term Debt Management Strategy Mission: Application of the MTDS Toolkit


Prepared by Liam O’Sullivan (AFR).


The definition of public debt used for the purpose of this analysis includes federal government but not state and local government debt. Sub-national debt accounts for 15.7 percent of total public debt.


Long maturity and grace periods minimize near-term rollover risk (liquidity risk), and exposure to interest rate risk by spreading refinancing over time or pushing it further into the future.


However, Eurobond bullet repayments pose significant refinancing risk when they become due and need to be managed carefully.


Loans from IBRD, African Development Bank and France are referenced to US 6-month LIBOR, with margin ranging from -0.46 –1.25 percent (Source: DMO).


The analysis excludes net claims from the central bank, given the negligible size. However, converted bonds are part of the analysis as they are included in the domestic debt stock portfolio.

Nigeria: Selected Issues
Author: International Monetary Fund. African Dept.