In recent times, there have been national debates on similarities in the current borrowing behaviour of the Nigerian government and its rising debt profile with that experienced in the 70’s. This has thus spurred worries and fears in the minds of the average Nigerian, economists and analysts alike as it took the country almost three decades to escape that storm cloaked as Nigeria’s debt trap under the administration of former President Olusegun Obasanjo.
A repeat performance seems to be brewing as President Buhari recently sought the approval of the senate to obtain $4 billion and €710 million loans to address critical projects approved by the Federal executive council. This has again brought to the fore concerns over the country’s rising debt profile.
Nigeria’s total public debt stock rose from N33.11 trillion as of March 31, 2021 to N35.47 trillion as of June 30, 2021. This shows an increase of 7.13 percent within the 3-month period. As of May 2021, the debt service to revenue ratio was pegged at 98percent.
This surge in the nation’s debt burden with its impact on debt servicing cost is raising concerns on the country’s debt sustainability. A breakdown of the debt stock revealed that the debt from foreign sources increased to N13.7tn as of June from N12.5tn in March 2021. Similarly, local debts rose to N21.8tn as of June from N20.6tn in March 2021. Consequently, debt to GDP ratio rose to 21.9 percent in June 2021 from 21.1 percent in March. Though the ratio remains well below the revised DMO’s borrowing limit to GDP ratio of 40 percent (25 percent previously), the debt service to revenue ratio remains worrisome.
Pat Utomi, a professor of Political Economics stated, “Despite the country’s poor revenue-generating capacity, overheads and statutory spending have continued unabated, amid a growing infrastructure deficit.”
Nigerians are increasingly worried about the government’s rising debt profile, anticipated to increase given the planned Eurobond offering. FGN bonds and NTBs together comprise 92% of the entire debt stock.
FGN’s investor presentation on Friday for the current Eurobond issue indicated that as at the end of June, its domestic debt totalled N17.63trn (USD42.8bn at the I&E/NAFEX rate). In three months, the burden further increased by N1.12trn with N780bn for the stock of FGN bonds and N390bn for NTBs inclusive. The issuance of bonds has soared as the DMO chases its domestic funding target of NGN2.34trn for the full year.
Ayo Teriba, CEO Economic Associates said “The goal must be the replacement of interest-paying commercial bonds with interest-free commercial bonds on a wholesale basis to drastically reduce or eliminate the N4.9 trillion annual average interest payments that is projected in the 2022-2024 MTEF. Rather than issue interest paying bonds to fund infrastructure, we should create special purpose vehicles for packaging infrastructure assets for interest-free financing through asset-linked non-convertible or convertible bonds.”
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“It is not clear what we should make of the well-established fact that interest payments on debt are perennially consuming nearly 100 percent of the revenue available to the Federal Government of Nigeria. There is currently no consensus on the way forward,” he added.
Since the economy slipped into recession in 2016, sub-optimal performance in revenue targets and ballooning expenditures has forced the government to rely heavily on borrowings to finance its fiscal deficit. This has led to a surge in the nation’s debt burden with its attendant impact on debt servicing costs, raising concerns on debt sustainability.
“With the current depreciation of the local currency, pressures from servicing the increased external borrowings will keep debt servicing costs elevated in the medium term. Also, the expected Eurobond issuances will further intensify pressure should actual revenue keep lagging expected performance,” Teriba stated.
“Clearly, there is a need to take decisive steps to curb expenditure. The government will need to pay more than lip service to the age-long clamour to improve revenue generation through diversification of its revenue-earning sources,” Utomi said.
“While it is not the first time in our history that we have been in these kinds of dire streets, it is pertinent that we draw lessons from our historic track-record and use it to reflect on what we need to do,” Utomi added.
The fact remains that the recent request by the president to borrow new loans of $4 billion and €710 million respectively would not necessarily bring Nigeria to its knees currently (even though a significant portion of our revenues currently go into servicing debts). However, the point of inflection emanates from the maladapted investment angle of the argument. Thus, the real issue is the targeting of these borrowed funds to viable/profitable investments rather than servicing more and more debts.
Projected debt costs for 2022, 2023 and 2024 stands at N3.6 trillion, N4.9 trillion and N6.16 trillion respectively as against the projected revenues of N8.36 trillion, N10.18 trillion and N10.9 trillion for the period under review. This implies consecutive rising debt cost revenue ratios of 43 percent in 2022, 48 percent in 2023, and 56.52 percent in 2024.
Teriba in an interview further stated that Considering the now established tendency for actual debt service to overshoot projections and actual revenues to undershoot projections, it should be obvious to most unbiased observers that the debt service to revenue ratios over the 2022-2024 horizon would be closer to the stark realities depicted by the recent outturns in 2020 and January to May 2021 of 85 to 98 percent of revenue than the wish-driven 43 to 56.5 percent of revenue projected in the 2022-2024 MTEF.
Also contributing to the current debt dilemma are the disparate and rather confusing views about how to resolve the high debt service to revenue ratios by supranational observers, reputable national thought leaders, and key government officials.
The IMF and the World Bank are of the opinion that high debt service to revenue ratios crowd out spending on economic and social priorities and urged the government to cut subsidies and/or increase taxes.
While national thought leaders have opined that high debt service to revenue ratios reveal a debt sustainability or solvency problem and urged the government to stop borrowing and/or cut costs of governance.
On the flip-side, key government officials have suggested that low revenue is the problem, and if we can get more revenue, the high debt service to revenue ratios will become much lower. These diverse patterns of thought are what has led Nigeria’s debt profile to the current ‘sink hole’ which it currently finds itself in.
What is Nigeria’s solution out of this looming debt trap?
Teriba stated that the only sensible way to navigate out of this brewing debt trap is to place the proverbial ball squarely back in the court of the DMO.
To solve the problem presented by debt cost, Nigeria needs to reduce or eliminate the debt cost itself; not increase revenue, increase tax, remove subsidies, stop borrowing, or reduce cost of governance.
“Issuance of interest-paying bonds is an unnecessary and avoidable drain on our hard-earned revenue, even if we have the revenue in abundance. Reducing interest payable on any given debt stock is the most enduring way of resolving the issue at hand,” Teriba said.
“Opportunities for issuing non-interest debt abound locally and internationally, other countries are seizing heavily on these opportunities, but Nigeria continues to shun such opportunities by continuing to unnecessarily pile up interest-paying debts in commercial markets at home and abroad,” he added.
Nigeria should aggressively restructure its debt portfolio by replacing interest paying commercial bonds with interest-free commercial bonds on a wholesale basis to drastically reduce or eliminate the N4.9 trillion annual average interest payments that is projected in the 2022-2024 MTEF.
“Rather than issue interest paying bonds to fund infrastructure, we should create special purpose vehicles for packaging infrastructure assets for interest-free financing through asset-linked non-convertible or convertible bonds. Ideally, this should happen in a rule-based fiscal regime with an independent advisory fiscal commission as watchdog,” Teriba concluded.
Nigeria needs to develop a clear national strategy which looks at how growth can take place in a sustainable manner in the economy rather than borrowing to fulfil unwarranted recurrent expenditures. In that event, the government can borrow 3 times as much as it borrows now and Nigerians would not be worried.
However, with the current trajectory of maladapted borrowings, Nigeria is most likely headed for an inevitable ‘debt trap’.
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