Will Nigeria go the way of Sri Lanka to default on Eurobonds?

Sri Lanka, formerly called Ceylon, has become the new poster child of a sovereign debt default. Until Russia technically fell into the same mess (although for a slightly different reason – Russia has the financial capacity to pay sanctions prevented its ability to settle the obligations of the West-dominated financial system), the island nation, off the Southern tip of India, was the reference point in discussions on debt defaults, while the question is: Who will be next?

Some Nigerians have even ventured to ask if this country is or will soon be on the same road that Sri Lanka has gone. They are worried because they see similarities in the conditions of the two nations: mounting debts and falling revenues.

“We are already close to the Sri Lanka situation and hopefully we can avoid it but this won’t happen by just wishing it away,” says Dr Bongo Adi, a senior lecturer in economics at the Lagos Business School.

Sri Lanka fell into the default in May following the expiry of a 30-day grace period given it for missing interest payments on two occasions. Bond interest rates are paid typically twice in 12 months. This was in respect of two bonds, including its $1bn, 5.875 per cent bonds that mature in July 2022. The price of the bond has fallen to just 46 cents out of each dollar.

The summary of Sri Lanka’s conditions was presented by the Prime Minister, Ranil Wickremesinghe, who told the Parliament on June 23 that the country was “facing a far more serious situation beyond the mere shortages of fuel, gas, electricity, and food. Our economy has completely collapsed.”

The dire situation of this country is such now that, according to the PM, the Ceylon Petroleum Corporation, its national oil company, has $700mn in debt, and consequently, no country or organisation is willing to provide fuel, even for cash.

Why did Sri Lanka default? The country’s debts had risen, with external debts currently standing at about $51billion, while income had dried up. Sri Lanka depends on tourism and remittances by its migrant workers for its foreign exchange earnings. Unfortunately, both sources were cut by the COVID-19 pandemic.

Since it gained independence from Britain in 1948, this is the first sovereign debt default by this country.

What should Nigeria do to avert sinking deeper and deeper into that sort of bottomless hole that Sri Lanka has found itself in? Dr Adi says this involves a long-term strategy.

“To get the economy on the right track, this will not happen in four years. What this country needs is a ten-year project, but it has to start now,” he pointed out.

According to him, it should begin in the political arena: “Get someone who can take some unpalatable decisions. We must get our politics right by getting the leadership right person.”

Financial analysts point out that Nigeria still has some respite. In the next two to three years, Nigeria does not have a lot of bond maturities that could pile up pressures on the government for repayments.

Over the period the country will be saddled with monthly interest rate payments of about $100m. So, on a cash flow basis, Nigeria does not have any pressure, they point out.

Nigeria has 13 outstanding Eurobonds with maturities stretching from next year to 2051. The earliest is the July 2023 $500m, 6.375 per cent bond, and the 2025 $1.118bn, 7.625 per cent bond. These are the immediate maturities facing the country, until 2027, when the $1.5 billion, 6.5 per cent bond will be due.

Nonetheless, with external reserve dwindling and oil production falling, the earlier the policy makers took prompt action to avert this brewing risk, the better for the country.