Fiscal instability: Behind the ticking time bomb of Nigeria's debt

Nigeria’s fiscal instability is a ticking time bomb, threatening the nation’s economic future. The country’s financial troubles didn’t start recently; they have been a growing issue for years and are getting more severe. Rising interest rates now force the federal government to spend more on paying interest on its debt.

This situation is problematic because it means less money is available for crucial sectors like agriculture, health, and education. These areas are vital for improving the lives of the citizens.

As interest rates climb, the government’s budget gets squeezed, with a larger portion going towards servicing debt. This shift means that less funding reaches sectors that could make a real difference in the quality of life for many people.

Agriculture, for instance, is more than a livelihood; it’s the heartbeat of millions. In Nigeria, it significantly contributes to the economy, providing employment and ensuring food security for families.

“This shift means that less funding reaches sectors that could make a real difference in the quality of life for many people.”

Data from the National Bureau of Statistics (NBS) shows that in Q1 2022, the agriculture sector grew by 11.55 percent year-on-year, contributing 22.36 percent to the overall GDP in real terms. Despite challenges, this sector remained a vital pillar.

However, in Q1 2023, the growth rate declined to 2.31 percent year-on-year in real terms. Severe cash crunches impacted performance, leading to a decrease in agriculture’s contribution to the overall GDP to 21.66 percent.

By Q1 2024, the sector saw a slight rebound, growing by 0.18 percent year-on-year in real terms. This modest improvement followed the previous year’s decline, with agriculture’s share of the overall GDP standing at 21.07 percent. This reflects ongoing struggles but indicates a modest recovery.

The government’s increasing expenditure on debt interest highlights a critical issue. When a significant portion of the budget is allocated to interest payments, the available funds for essential services diminish.

This situation creates a cycle where rising debt interest leads to less investment in crucial areas, which can further exacerbate social and economic challenges.

Nigeria’s debt has surged dramatically, rising from 4.14 trillion Naira in 2005 to a staggering 121.67 trillion Naira by the first quarter of 2024. This sharp increase highlights the escalating borrowing and the growing challenges in debt sustainability and fiscal management for the Nigerian government.

As Nigeria’s debt crisis deepens, it’s essential to understand the historical context and current fiscal challenges. Historically, as shown in the publication of LBS July session, Nigeria’s debt issues have deep roots. By the end of 1952, Nigeria’s total debt burden had reached £21.24 million. As colonial rule ended in 1960, the country’s aggregate debt stock stood at approximately £17 million.

The national debt burden increased significantly as the country sought to finance its war efforts from 1967 to 1970. From 1970 to 1979, Nigeria’s external debt grew at an alarming rate, accumulating rapidly when oil prices crashed in 1982, reaching over $30 billion and leading to a severe debt crisis.

In 2005, Nigeria secured a landmark $18 billion debt relief, clearing the remaining $12 billion owed to the Paris Club in 2006.

By 2023, the debt-to-GDP ratio was 46.3 percent, now 52 percent. In the first quarter of 2024 alone, N2.46 trillion was used to service public debt, highlighting the persistent challenge of managing the nation’s financial obligations.

This situation is not unique to Nigeria. Highly indebted countries are likely to experience instability, and Africa’s growing debt burden is becoming a significant concern. As borrowing continues to rise, many nations are becoming ensnared in a vicious cycle of financial distress.

Nigeria stands out as a prominent example, but it is not alone. Other heavily indebted African countries include South Africa with $294 billion; Egypt with $265 billion; Morocco with $135 billion; and Algeria with $127 billion. Nigeria ranks fifth among these nations.

Moreover, according to the Economist Intelligence Unit (EIU), Kenya, Angola, Ethiopia, Ghana, and Côte d’Ivoire occupy the 6th through 10th positions, respectively, in terms of debt levels.

This widespread debt crisis underscores a broader trend of economic vulnerability across the continent. Additionally, many African countries, including Nigeria, have significant portions of their debt in foreign currencies, which adds another layer of complexity to their financial challenges.

Amid these financial strains, Nigeria faces a series of pressing challenges. The rapidly growing national debt, combined with rising insecurity, casts a long shadow of uncertainty over the future.

This instability is affecting not only the country’s economic prospects but also driving many individuals to look for opportunities abroad, despite their high qualifications. This outflow, often called brain drain, further depletes Nigeria’s pool of skilled professionals and worsens the existing talent shortage.

Adding to the complexity, Nigeria is grappling with a highly polarised political climate. The deepening divisions within the political sphere are making it harder to reach consensus on essential reforms and policies.

This lack of unity hampers the government’s ability to effectively address the nation’s crises and stabilise the situation.