Nigeria’s widening infrastructure deficit has been a recurring discourse over the years as it is widely believed that the weak stock of infrastructure investments is one of the biggest challenges to the ease of doing business. However, the question that has often been left unanswered is “how the infrastructure deficit will be financed”?
According to the IMF, Nigeria’s infrastructure stock of c.25% of GDP remains far below the 70% international benchmark. This implies that Nigeria’s public capital stock per head is lower than the global average, a situation that has constrained the growth in GDP and hindered private sector investment.
Recently, the Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, disclosed that the Federal Government will require about N36trn (US$100 billion) annually for the next 30 years to effectively tackle Nigeria’s infrastructure challenges. The Minister further stated that with the shortfall in oil revenue in recent times, it is difficult to address the infrastructural deficit. Capital expenditure in 2018 stood at N820.6 billion (as at 14th December 2018 according to the budget office of the federation), far below the budgeted sum of N2.9 trillion translating to a performance ratio of just 28.6%.
Taking into cognizance weak government revenue, ballooning recurrent expenditure, and elevated debt servicing costs which has raised concerns on debt sustainability, we think governement lacks the capacity to self-finance the required infrastructure investment. Consequently, there is the need for the government to consider unconventional methods of financing to bridge this huge infrastructural deficit.
Recently, the Nigerian Stock Exchange announced the listing of the Federal Government N15 billion Green Bond (a 7-year bond issued at a coupon rate of 14.50% on June 13, 2019). This follows the debut Sovereign N10.69 billion Green Bond that was issued in December 2017 and listed on the NSE in July 2018. Green Bonds are targeted towards financing renewable energy, afforestation, and transportation projects.
Though different from the regular bonds issued by the Federal Government, green bonds still remain debt instruments issued by the Federal Government and will likely put further pressure on the already high debt servicing cost of the government. In our view, creating a strong framework for private sector investments through public-private partnership (PPP) remains the most cost-effective means of bridging the infrastructure deficit in the country.