Is Nigeria’s debt sustainable?

The Debt Management Office (DMO) has published the 2014 Debt Sustainability Analysis (DSA) for Nigeria. Credit should be given to the DMO for the regular update on Nigeria’s debt status. Debt sustainability is not really about the size of a country’s liabilities, but about the resources available to service and settle them. The baseline scenario from the DSA released by the DMO for 2014 and projections till 2034 suggest that Nigeria is a very low risk of debt distress. Some globally acceptable solvency and liquidity ratios were examined to deliver the clean bill of health on Nigeria’s debt sustainability.

It is commonplace that when central bankers, macroeconomists, and politicians talk about the national debt, they often express it as a percentage of the total value of all goods and services produced in a country each year, which is the Gross Domestic Product (GDP). This comparison, however, provides a flattering image of government finances. The idea of comparing how much a country owes to its GDP (also thought of as the national income) assumes that the government has access to all the national income rather than just the share of the income it collects as taxes, and revenue generated from other endeavours.

A better approach would be to scale the debt against government revenue since government debt will be serviced and settled from government income rather than from the national income. This provides a better picture of the burden of a country’s debt on its government’s finances. A country with higher revenue can afford more debt than a country with low revenue. Debt to GDP ignores this important difference.

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According to the DMO, the baseline scenario was “premised on the existing macroeconomic framework of the country as outlined in the 2014 Federal Government Budget and the MTEF, 2014-2016, which are predicated on a stable macroeconomic operating environment, resulting from the fiscal consolidation stance and tight monetary policies of the fiscal and monetary authorities respectively, as well as the ongoing reforms in the key growth sectors of the economy, namely: agriculture, power, oil and gas, transport and housing”. The baseline scenario is already rendered inconsequential in the short to medium term given the current happenings, and the 20-year outlook is more of semantics as projections beyond 2-3 years are usually as far from reality as they possibly can.

In my opinion, a very good place to start our assumptions is to examine the recent trend over the last five to seven years and assume the outcome as our baseline, along with more realistic ratios that speak to the government’s ability to service and settle its debt. If this approach is employed, we will have a different picture from that painted by the 2014 DSA.

According to data from the DMO and the Central Bank of Nigeria, in 2008, the Federal Government’s domestic debt was NGN2.3trn, while the external debt totalled NGN523.3bn. By the end of 2014, the domestic debt had increased to NGN7.9trn, a 240.6 per cent jump, and increasing at an average annual rate of 23.3 per cent. The external debt during this period had increased by 194 per cent to NGN1.5trn, growing at an annual average rate of 20.04 per cent. To add a bit more perspective to the earlier stated figures, during this period, the Federal Government’s retained revenue increased by 33.3 per cent from NGN3.2trn to NGN4.3trn, growing at an annual average rate of 5.6 per cent.

In 2008, total Federal Government debt was only about 89 per cent of its retained revenue, while foreign debt was only 16.4 per cent of retained revenue. By 2014, the total central government’s debt had increased to 258 per cent of its retained revenue, while foreign debt as a proportion of central government’s retained earnings had more than doubled to 36.2 per cent. If this trend is extrapolated, in a few years Nigeria’s debt burden will be too much for government finances to bear. If we compare these measures to Nigeria’s current debt-to-GDP ratio of about 11.4 per cent, which has a distress threshold of 50 per cent, then there is the likelihood of it engendering a false sense of security. To put things in context, Ireland and Greece, two of the countries in Europe that have recently been distressed, had debt-to-revenue ratios of 262 per cent and 351 per cent, respectively.

Measuring the national debt as a percentage of GDP may be a common international norm, but it makes little sense in the case of Nigeria, particularly because Nigeria is dependent on revenues from the sale of crude oil rather than taxes. Ideally, government revenue from taxes should correlate with the size of the economy, but for Nigeria, this is not the case due to the ineffective tax system, which is made more difficult by the large informal sector.

If the current economic structure subsists, then Nigeria’s debt sustainability will be dependent on what happens to oil prices and production. If the ongoing international energy dynamics are taken as auguries of events to come, then danger looms for Nigeria, unless urgent measures are taken to address and redress the rate of debt accumulation.

Olugbenga A. Olufeagba