Is the nation’s debt level sustainable?

Most economists believe that it is logical to consider debt -to – revenue ratio rather than debt – to – GDP. It is revenue, they argued, that will be used to service debt and repay the capital, not GDP

There is no doubt that Nigeria is a developing country with a fast-rising population of over 200 million people. A look at physical structures and an assessment of our technological facilities in Nigeria gives an impression that the country is in dire need of infrastructure to boost the economy.

When we look at the debt profile from the angle of infrastructure deficit, one is tempted to say that the high debt level is justified. But within our country, poverty is increasing, job losses are rising, industrial base is shrinking, while health and educational facilities remain inadequate amidst a fast growing population.

As a consumer and scholar of history, there is a feeling that the upsurge in the country’s debt profile is not healthy. We have seen in recent times that economic growth and investment opportunities are not at the level expected by Nigerians despite the country’s significant borrowing.

Why is this so? Nigeria’s economy is affected by a catalogue of challenges including excessive government spending, exchange rate volatility, inefficient loan utilization, and poor debt management amongst others.

Many Nigerians are concerned about their country’s rising debt profile. We have not forgotten how debt to the Bretton Woods Institutions before the return to democracy in 1999 frustrated the country’s development for many decades.

It was because a sizable portion of the country’s income was channelled towards servicing accrued debts leaving little or nothing for economic development. Although no single factor can lead to underdevelopment of a nation, huge debt coupled with other factors at that time frustrated all developmental efforts of governments.

Nigerians jumped for joy when ex – president Obasanjo struck the debt buyback deal that rescued the country from the shackles of debt. The expectation then was that the country’s revenue would be invested in developing the country rather than being used either to pay interest or service debts.

One cannot blame those Nigerians and most importantly economists who are expressing concerns about Nigeria’s extensive borrowing. They believe that the country is treading a familiar path, and that, if necessary, steps are not taken by those in authority, the country may soon be caught in another debt trap.

What are the signs to enable us ask if the country is on the path towards a debt trap? Archival reports show that towards the end of the year 2021, Nigeria’s total debt stock was N38 trillion (thirty-eight trillion Naira), according to the Debt Management Office (DMO).

peep at the 2022 Appropriation Act, shows that the Federal Government (FG) considered increasing the country’s debt profile by another N6.0 trillion to finance the 2022 Budget of N17.126 trillion. There are plans by Nigeria to use N3.9 trillion out of the N6.0 trillion to service outstanding local and foreign obligations.

This is worrisome, as reports show that the country has spent US$5.2 billion to service its external debts and N13 trillion for its domestic debts in the past 5 years. With these statistics, can we say that Nigeria’s debt is sustainable? We ask this question because when expenditures are beyond revenues, the country will not be able to meet all its current and future capital expenditures without borrowing or going into default.

Read also: Experts flag use of debt, tax burden to fund 2022 budget

Recently, the President of the African Development Bank (AfDB), Akinwunmi Adesina, and some prominent Nigerians have expressed worry about Nigeria’s debt servicing. Although, Adesina agreed that debt -to – Gross Domestic Product (GDP) ratio is considerably moderate and within acceptable limits at 33 percent.

But the big question economists are asking is: How will the country service its debt and the implication for domestic debts which is needed to stimulate faster economic growth? This according to the AfDB President, leaves Nigeria’s economy in a vulnerable situation.

COVID–19 has exposed Nigeria and most other countries to liquidity challenges. In the case of Nigeria, both debt service to revenue ratio and foreign exchange challenges have been exacerbated. On many occasions, the FG has justified its borrowings by arguing that the country’s appetite for loans is within acceptable limits at the end of the financial year 2021.

And that loans borrowed are to improve the country’s infrastructure. Nigeria’s debt, according to those in authority, is sustainable. On the rising debt profile, some economists are worried, and many consumers are frustrated because Nigeria is not earning enough to meet its financial obligations amid rising poverty.

Economists and public intellectuals strongly argued that servicing debts with about 80 percent of the country’s total revenue is not healthy. They referred to reports showing that debt service – to – revenue ratio was as much as 97.7 percent from January to May 2021.

Bearing in mind these statistics, some analysts concluded that our public debt is unhealthy. And that no matter what those in government say, Nigeria has a debt problem. To support this position, some analysts believe that the loans do not seem to have the capacity to repay itself at the expiration of the tenor.

So, what is the way forward? One would have suggested diversification of the country’s economy from crude oil. But the Honourable Minister of Finance, Budget and National Planning in a press conference, told the world that Nigeria’s economy is diversified.

Most economists believe that it is logical to consider debt -to – revenue ratio rather than debt – to – GDP. It is revenue, they argued, that will be used to service debt and repay the capital, not GDP. GDP is an estimate.

In order to alter course from the path towards debt trap, Nigeria must review and scale down its borrowings, develop further its diversification program, cut down on wasteful expenditures from all angles and do more to asphyxiate corruption.

Most importantly, those in authority must map out strategies to secure the country. Without security in the country, there will be no meaningful development. Today, the country’s current debt profile is not sustainable. Thank you.

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