In the last four years, Nigeria’s traditional methods aimed at improving economic growth such as borrowing money to fund budget deficits have failed to spur growth in the Nigerian economy hence the need for an alternative strategy.
While growth has failed to rake place within the period, Nigeria has instead doubled its domestic and external borrowing, to fund its ever-growing budget deficit under the current government.
Government’s desire to fund deficits to spur growth drove the country’s debt stock in the last five years to N24.94 trillion, up from N12.06T, that is an increase of 107 percent. Budget deficit of N9.16 trillion accounted for 71 percent of the increase.
In the same vein, total expenditure during the period expanded by some N4.96 trillion to N23.29 trillion with actual budget deficit accounting for 39 percent against 23 percent four years prior 2015.
However the leverage and expenditure strategies of the current administration have failed to translate into growth in the economy instead the economy had witnessed subdued growth, recession in 2016 and a high debt service to revenue ratio.
Spike in debt levels has seen analysts and international bodies raise concerns on the need to curb borrowings, or create a possibility of a debt overhang in the long run.
This is a state where the nation’s debt exceeds its future capacity to repay hence creating the possibility for stagnation in growth and degradation of living standards.
“A possibility of debt overhang is not substantial for now as the level of foreign debt compared to external reserves and current account inflows is not so much of a problem,” Abimbola Omotola, Macro and fixed income analyst told BusinessDay.
Currently about 68 percent of current debt levels are domestic debts which is serviceable by naira revenue while 32 percent is foreign debt.
“The size of the debt itself isn’t really the problem as debt to GDP ratio is low compared to other countries in Africa,” Abimbola Omotola, “the major concern is Nigeria’s debt affordability and revenue levels.”
Analysts therefore call for a more effective strategy of creating an enabling environment for businesses to thrive as federal government expenditure which accounts for about 7 percent of GDP is impossible to spur growth in the aggregate economy.
“We need to improve consumer and investor confidence to spend more in the economy,” Omotola said.
Private sector consumption is about 60 percent while investment about 20 percent of GDP, according to data from the National Bureau of Statistics (NBS).
Hence, the federal government may need to focus more attention on local capital formation and FDI which is sufficient to spur growth in the economy.
With economic growth which has halved in the last 4 years from an average growth rate of about 5 percent in periods prior 2015, Tunde Fowler, FIRS chairman explained how this currently affects the government’s revenue target hence, putting a strain on Nigeria’s debt affordability metrics.
Supporting this claim is a report from the National Bureau of statistics (NBS) which puts the number of small and medium businesses that shut down between 2013 and 2017 at 2,877 with other struggling to pay taxes on sluggish economic activities.
The plethora of challenges facing the Nigerian economy buttresses the urgency for the federal government to shift focus on reforms that will boost local capital formation and FDI inflows in the economy.
Recall, FDI inflows hit its 15-year-low in Q4 2018 at $2.2 billion while trade war tension in the global economy still poses a threat to the nation’s foreign reserves as volatile crude market gave a warning signal some weeks back.
Recent announcement of $9bn legal dispute with Irish Gas Company, Process and Industrial Development Ltd (P&ID) also raises worry concerns.
David Ibidapo
