Nigeria’s low revenue generation is piling pressure on its debt servicing crisis which has now been compounded with the devaluation of the naira, according to a virtual year-end media brief by Citi economists.
But while Africa’s most populous nation’s debt is ballooning as a result of the government’s inability to generate revenue needed for inclusive growth and lower borrowings, its counterpart in South Africa is clearing up its debt obligations on increased earnings.
“Nigeria’s low revenue collection exacerbates its debt servicing challenges, while South Africa’s higher revenue offsets its larger debt,” said David Cowan, Citi Economist for SSA in the brief, titled Is Africa on the Cusp of a New Growth Spurt in 2025?
Nigeria spent as much as $3.58 billion to service its external debt in the first nine months of 2024 despite a series of reforms implemented by the government that were supposed to raise revenue and control borrowings.
The surge in the debt servicing represents a 39.77 percent increase from the $2.56 billion spent during the same period in 2023, according to data from the Central Bank of Nigeria on international payment statistics.
The global credit ratings agency, Fitch, recently projected Nigeria’s external debt servicing will rise to $5.2bn next year.
Read also: Can Nigeria escape the debt trap?
This is despite the current administration’s insistence on focusing more on domestic borrowings from the capital market.
It also estimated that approximately 30 percent of Nigeria’s external reserves are constituted by foreign exchange bank swaps.
Nigeria’s foreign debt surged to $42.9 billion in the second quarter of 2024, up from $42.1 billion in the first three months of the year amid naira volatility, according to the latest report by the Debt Management Office (DMO).
But the nation’s stock of external debt was even more pronounced, expanding by 13 percent quarter-on-quarter and 90 percent year-on-year to N68 trillion, primarily reflecting the depreciation of the naira.
To put in more context, Nigeria’s total external debt stock is equivalent to 27.4 percent of 2023 gross domestic product (GDP), highlighting the chunk of debt the country owes abroad.
Addressing this shortfall in revenue, the government is awaiting legislative approval for a series of tax reforms which have been put to a halt until some grey areas that have resulted in heightened controversies are resolved.
With over 60 different federal, state, and local taxes, only about 10.9 percent of the country’s GDP is collected in government revenue—well below the sub-Saharan African average of 16.5 percent.
“The current tax-to-GDP ratio is dangerously low because citizens aren’t paying their fair share,” says Wale Edun, Nigeria’s finance minister and coordinating minister of the economy, speaking at an investors’ forum hosted by the DMO in Washington, DC. “This is inadequate for a country of Nigeria’s size and ambitions.”
The new reforms seek to boost the tax-to-GDP ratio, bringing it closer to the sub-Saharan African average.
Cowan however emphasised the need for tax reforms to address Nigeria’s fiscal imbalances and revenue shortages.
“The emphasis must be on tax reforms and exchange rate policies to prevent recurring imbalances,” he said.
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