The International Monetary Fund (IMF) has warned that Nigeria’s decade-long rise in public debt could create both financial as well as revenue squeeze for the economy in the medium term.
The Fund’s mission chief for Nigeria, Jesmin Rahman in the IMF/Nigeria 2021 article IV consultation staff press conference stated that though the country’s current debt dynamics at the moment seem favourable as it still resides within the 30 percent threshold, its trajectory, however, would become a major economic concern in the medium term.
“Public debt threshold for emerging markets stand at 10 percent; however, Nigeria currently spends above 80 percent to service its debt.
“Recent estimates indicate that public debt is to increase from 36 percent to 40 percent in the medium term. Should this happen, it is going to become a major cause for concern for the Nigerian government,” she said.
Debt servicing for Nigeria since the oil decline in 2020 has been dependent on CBN overdraft and Eurobond subscriptions.
Thomas Alun, a senior economist at the IMF stated that while Nigeria’s Eurobonds are oversubscribed, dependence on Eurobonds however, is quite risky as economic volatility could translate to both financial as well as revenue squeeze for the Nigerian economy which in turn further escalates the country’s rising debt.
He further stated that Nigeria’s debt sustainability or further crisis is dependent on a number of economic factors.
“Nigeria’s debt trend is not looking favorable on the debt portfolio end but the estimates are dependent on various economic factors.
“Whether debt becomes stressful or not is dependent on a number of factors like growth, interest rate, oil prices, financing situation in the country amongst others,” Alun said.
Nigeria’s debt service is currently suffocating federal spending and by extension is suffocating the general economy and the living conditions of Nigerian households. Accompanying this grim reality is the government’s heavy reliance on oil revenues which has been extremely anemic in the last couple of years.
Dwindling oil revenues which emanated in 2020 as a result of the slump in oil prices in the international market due to the covid-19 pandemic, necessitated the Nigerian government to rely heavily on borrowing (both external and domestic), to finance its projects and try to close up budget deficits.
This notwithstanding has not convinced the Nigerian populace as well as foreign investors’ as to why the country’s borrowing has been significantly rising since 2016 with no evidence (infrastructure or otherwise) to justify it.
Dating back to 2015, data culled from the Debt Management Office (DMO) revealed that the nation’s external debt stood at $10.31bn and total public debt stood at $63.806bn or N12.1trn within the review period.
Six years down the line (2021), the figure had almost tripled to $37.95bn for foreign debt and $92.626bn or N38.0trn for total public debt as of September 2021, representing a 268 percent increase in external debts and a 214.0 per cent increase in total debts.
In a failed attempt to sustain these debts, the Federal Government spends trillions of naira yearly servicing more debts.
Since 2017, this administration has spent a total of N15.375trn on debt servicing, excluding N296bn and N110bn allocated for sinking funds in 2019 and 2020.
Ayodeji Ebo, head of Retail Investment at Chapel Hill Denham told Business Day that when a budget crisis emanates, the capital expenditure which directly impacts the general economy is always at the receiving end.
“We cannot be talking about having any meaningful growth in the economy if we don’t spend more on capital expenditures, which happens to be the productive sector.
“From potholed and often barely paved streets of Lagos to moribund refineries around the country to accident-prone highways on Federal roads to inadequate health and education infrastructure, both Nigerians and foreign investors visiting Nigeria are reminded repeatedly of the country’s urgent need for capital. Many investors, however, continue to be willing lenders, despite obvious signs that their money may not always have been put into the most productive use.
“This is one of the major reasons why when the base effect is taken out of the equation, we still see that the country’s growth rate is still lagging behind the population growth rate.
“Another major concerning factor is that recurrent expenditure continues to increase which means that the government would subsequently increase borrowing and as a result, servicing cost would continue to increase which would, in turn, translate to an inefficient budget,” Ebo said.
This has, as a result, erupted questions by analysts as to whether the public finances of the biggest economy in Africa (Nigeria) are as sustainable as they appear and why the country’s debt has lingered this long and continues to significantly increase.
Between 2017 till date, the Federal Government has budgeted a total of N19.16trn for capital expenditure (money spent to buy, maintain or improve fixed assets).
Data from the Budget Office revealed that in the 2017 fiscal year, the Federal Government spent N2.177trn out of N7.441trn aggregate revenue as capital expenditure. The amount represented 29.25 percent of the total revenue in that year.
For 2018, N2.873trn was expended on capital projects, which was 31.50 percent of N9.120trn total expenditure.
In 2019 and 2020, N2.090trn and N2.140trn, respectively, were spent as capital expenditure. The figures represented 23.43 percent and 20.71 percent of aggregate expenditure for the years which was N8.920trn and N10.330trn, respectively.
The amount budgeted for capital expenditure saw an increase in 2021 and 2022 as N4.989trn and N4.891trn were budgeted for capital projects. This shows 34.24 percent and 29.83 percent of aggregate expenditure for the years at N14.570trn and N16.391trn, respectively.
However, while presenting the 2021 budget performance, the Minister of Finance, Zainab Ahmed had said that N1.79trn had been spent on capital projects between January and August 2021.
Emeka Ucheaga, the CEO of EUA Intelligence and a financial analyst at Credit Direct limited stated that sub-national debt was also another factor that has played a significant role in elongating the country’s current rising debt debacle.
“Most states generate minimal revenue outside their monthly allocation of Nigeria’s anemic oil income. They depend almost exclusively on monthly allocations of federal revenues, which have been drastically declining in recent times,” he said.
Many states have been borrowing to meet their salary obligations, often at exorbitant interest rates (as high as 25-28 percent). States’ borrowing trends are risky and need to be addressed.
In 2015, Global Credit Ratings, the African equivalent of Moody’s or Fitch announced that it was going to place the sub-national debt sector on a negative outlook and downgrade five state government credit ratings. Of the eight states it rated, six were below the threshold for issuing investment-grade bonds.
Some of Nigeria’s richest states are actually its most indebted. They owe the most both in terms of overall dollar amounts and as a percentage of internally generated, non-federally derived revenues, or IGR.
For example, Data from Debt Management Office (DMO) revealed that Delta State which is popularly known for its oil-rich heritage was Nigeria’s third most indebted state as at the end of 2014.
It owed $233 million to its creditors, roughly five times its annual IGR then. This amount was well beyond the World Bank’s debt burden threshold that stipulated that debt should not exceed 200 percent of IGR.
Read also: Nigeria remains open to investors – DMO
That being said, half of all the states in Nigeria have debt-to-revenue ratios that are twice as high as the World Bank sustainability ratio or higher.
Just as there is no easy hack to paying back debts, there are no nice ways to say that the continuously increasing amount spent on debt servicing has debilitating impacts on the economy.
With 40 percent of Nigerians still living below the poverty line, Nigeria’s revenue projection is beginning to look unattainable and unable to meet the deteriorating situation in the country.
Esther Oye, an economic analyst and a lecturer at Covenant University stated that recent trends indicate that Nigeria is going to be borrowing to the quantum of our budget projections.
“The direct implication is that any additional money that the government spends would be from additional borrowing; so what it means is that the borrowing will continue to increase.
“If all our revenue is going to the servicing of debt, it means we have major fiscal problems which could have dire consequences in the near future,” Oye said.
The Nigerian economy has been and is still operating in ‘reverse’, Productivity rates are low while debt servicing is increasing (ridiculous). In order to restore balance, two critical realities are non-negotiable; productivity has to increase which in turn would translate to increased revenue. The government needs to begin to invest heavily in production else this ever inflating debt crisis would swallow the economy sooner than later.
