Nigeria first looked abroad for a loan in 1964 to build Kainji Dam, a gigantic hydroelectric dam on the Niger River which a New York Times article at the time described as the country’s “most ambitious project”.
The dam at Kainji Island, one of the longest in the world, was supposed to generate 760 megawatts of electricity to light up Nigeria and spur economic development.
A letter dated June 17, 1964 obtained by BusinessDay from the World Bank’s archives shows that the then Prime Minister, Tafawa Balewa, had requested and obtained an $82 million loan from the World Bank to fund the Kainji Dam project.
George Woods, who was the president of the International Bank for Reconstruction and Development, an arm of the World Bank Group, had said in the loan approval letter to Balewa that he was confident it would “mark an important stage in your country’s economic progress.”
Although it would later cost the government $209 million (equivalent to about $1.3 billion in 2020 dollars) to complete the project, the decision to borrow to fund an infrastructure project was indeed a game-changer for Nigeria.
While the Kainji Dam is still standing, 58 years later, not many ground-breaking projects that can stand the test of time have been built since then through loans.
The country’s latest foreign loan, a $1.25 billion loan from international investors, was not to fund an infrastructure project like Kainji Dam but to finance a wasteful petrol subsidy, according to the Economist Intelligence Unit (EIU).
The controversial petrol subsidy, which was initially to be phased out this June, will continue for another 18 months until President Muhammadu Buhari leaves office next year.
Despite the obvious drain of the practice on public revenues, Nigeria continues to stick with it against all odds.
“We are sinking deeper into debt with nothing to show for it in terms of infrastructure development and economic growth,” said Muda Yusuf, chief executive officer of Centre for the Promotion of Private Enterprise.
“It goes to show that we have not managed the economy well. Our increasing appetite for debt is creating a vicious cycle of more borrowing, high debt service, more recourse to the central bank, more inflation pressures and a weaker currency,” Yusuf said.
Nigeria’s total debt stock has more than doubled since the collapse of oil prices hurt government earnings in 2016, going from N17.36 trillion to N39.5 trillion in 2021, according to data from the Debt Management Office (DMO).
When the Central Bank of Nigeria’s lending to the Federal Government, which hit N18 trillion in January 2022, is added to the debt stock, it becomes N57 trillion ($136 billion).
President Buhari, who has borrowed the most of any Nigerian leader since 1999, has taken fresh loans of N22 trillion since he assumed power. Yet in that time, the economy has been in and out of two recessions.
His supporters point to data showing the economy grew at the fastest pace in seven years in 2021 but fail to attribute the growth to the low base effect of the COVID-ravaged 2020.
They also fail to acknowledge that the economy has shrunk from $546.67 billion in 2014 to only $436 billion in 2021, despite rising population. The shrinking economy has worsened poverty, and unemployment has soared to record levels.
Nigeria’s motivation for increased borrowing was to make up for the revenue shortfall caused by low oil prices, which bottomed in 2016. The country has racked up more external debt than any other member of the Organization of the Petroleum Exporting Countries since then, according to World Bank data.
Oil prices have since recovered but Nigeria’s finances have not. The country looks less of a major oil-exporting country with each passing day.
For instance, while Algeria is celebrating a revenue surplus as the Russia-Ukraine crisis drives up oil prices this year and is now giving out cash to the unemployed, Nigeria is borrowing to make up for a severe revenue crisis.
Low oil production caused by reduced investments in its oil sector, as well as the cost of the petrol subsidy, has muted the gains of higher oil prices for Nigeria.
Nigeria is the only commodity exporter to have tapped the Eurobond market this year. The country’s desperation was clear to see, given the premium paid to raise the Eurobond.
In another instance of how other oil exporters are benefiting from higher oil prices, Angola is seeing its currency, the Kwanza, gain substantially against the dollar since the rally in crude oil. Nigeria’s currency, the naira, has however weakened this year, with the gap between the official and unofficial rate widening to new levels.
With petrodollars on the decline and debt on the rise, Nigeria needs to utilise debt better and find new ways of bolstering earnings to avert a debt crisis, according to Johnson Chukwu, CEO of Cowry Asset Management Limited.
“Our debt sustainability is weakening as we accommodate more debt. If that continues, the implication is the debt level becomes unsustainable,” he said.
“The best thing to do now is to boost revenue by attracting private capital, local and foreign, into the economy. When the economy is bigger, the government earns more,” Chukwu added.
Yusuf, a former director-general of Lagos Chamber of Commerce and Industry, shares a similar view.
“The government needs to borrow to fund more capital projects and grow revenues by improving the investment landscape of the country,” he said.
