Over the years, Nigeria’s external debt level has consistently increased from single-digit level prior the year 2015 to double-digit level afterwards, with little impact on the growth of the economy, hence the need to justify why the country borrows.
The actors may differ but the story still seems to be the same, as external debt expands, economic growth contracts.
Nigeria’s economic growth has nosedived since national external debt began to swell again. Since 2014, Nigeria’s national external debt has increased 160 percent from $9.7 billion in 2014 to $25.27 billion as at December 2018.
While concerns have been raised on the rate at which the nation borrows externally which has necessitated some international bodies warning Nigeria against its rising levels, the story would have been different if these increases translated into higher real growth.
In the last 5 years, Nigeria, the most populous African country, has barely grown its economy at an average rate of 2.29 percent while growing its external debt at an average of 25 percent within the same period.
Foreign debt was accumulated to fund the ever growing budget deficit in the country. Rather than translate to faster economic growth, gross domestic product annual growth declined from 6.22 percent in 2014 to 1.95 percent in 2018.
Also, the latest National Bureau of Statistics (NBS) report on GDP showed a slowdown to 2.01 percent in Q1 2019 growth rate from 2.38 percent Q/Q.
The period also included one economic recession in 2016 and less than one percent growth in 2017, thus, calling into question the benefit of the expanding national debt on the economy.
Although we may blame the sluggish performance of the economy in the last four years on the collapse of crude oil prices as in the words of Patience Oniha, Director General, Debt Management Office (DMO) during a press briefing in August, 2018. “The huge borrowings sprang from the fall in crude oil revenue and the attendant devaluation of the naira,” she said. This necessitated increased government spending to boost output, yet this strategy has failed to yield the expected benefits. Money has been spent but growth has been scarce.
Between 2014 and 2018, Nigeria spent a total of N7.18 trillion servicing both local and foreign debt according to budget estimates. Yet the borrowings failed to lift growth as declining revenue was used to service rising public debts.
Poverty levels jumped in the country as economic growth in 2018 fell behind population growth for the fourth consecutive year leading the country to overtake India as the world poverty capital.
Debt service to revenue ratio is estimated to hover around 63 percent according to International Monetary Fund (IMF) estimates which is quite frightening for any economy.
At the end of 2015, the weighted average cost of national debt was 10.77 percent, driven by high cost of local borrowing which was around 13 percent. Little has changed since then, Nigeria’s average one-year Treasury bill on Tuesday, May 21, was 13.67 percent and 5-10 year bond yields were above 14 percent. Also with interest rate rising abroad, the cost of external borrowing is also on the rise, thus, putting further pressure on the weight average cost of debt.
In July 2018, DMO warned that Nigeria’s high debt service to revenue ratio, which deteriorated in 2016, could trigger a debt crisis. IMF also expressed concerns about Nigeria’s debt servicing capacity, as the size of the total debt keep rising against its revenue.
Currently, there seems to be no plan to cut the growing national debt, rather DMO is more focused on reworking the composition of the debt. DMO targets an optimal debt composition of 60:40 for domestic and external debt, respectively, as against the 70:30 as at June 2018.
Eventually if the next crude oil price shock occurs in 2019 or 2020, Nigeria may once again experience a full-blown debt crisis, which may completely cripple economic growth, if the debt growth is not curtailed soon.
