Nigeria’s unsustainable debt service-to-revenue ratio

In our editorial of July 25, 2018, we warned of an impending debt peonage if the large scale of borrowings, at usually high interest rates, were not curbed by the government. In a poor attempt to defend the borrowings of the government, The Debt Management Office (DMO) wrote a rejoinder to our editorial, which we published on August 2, 2018, denying any debt crises and assuring the reading public that regardless of Nigeria’s high debt to service ratio, Nigeria’s borrowing is sustainable and that the “government has also embarked on several revenue boosting initiatives with a view to increasing the size of the revenue available to finance the budget and reduce the debt service to revenue ratio.” For added measure, when we advised the government to seek alternative loans from multilateral agencies with very low interest rates instead of approaching shylock investors and borrowers, the DMO accused us of a poor understanding of the lending policies of multilateral agencies and that Nigeria could not approach these agencies because she has no balance of payment crisis.

However, the chickens have come home to roost and the government is mulling approaching multilateral agencies for loans due to the high revenue to interest payments that is now clearly unsustainable. Bloomberg media quoted Pat Oniha, Director General of the DMO as saying the government will explore the option of borrowing from multilateral agencies to avoid the punishing interest payments associated with issuing bonds. “Our preferred option is to explore concessional sources. One of our major objectives is to reduce debt-service costs.

The DMO puts Nigeria’s total (federal, state and FCT) debt stock, as at June 30, 2018, at N22.38 trillion (or $73.2 billion) representing 19 percent of GDP. This comprises external debt of about N6.75 trillion (or USD22.08billion) and domestic debt of about N15.629 (or USD51.12 billion). Based on the debt to GPD ratio, the Director-General of the DMO, Pat Oniha, has not missed an opportunity to remind Nigerians that “Nigeria’s borrowing remains sustainable in the short, medium to long term levels, guided by the DMO objective of prudence” and has even gone ahead to review the self-imposed country specific debt limit from 19.39 percent to 25 percent in the medium-term of 2018-2020 thus providing scope for more government borrowing.

The problem though is where Nigeria borrows from. The decline in oil prices has made it inevitable for Nigeria to borrow to finance public expenditure. However, rather than approach multilateral agencies for cheap loans, which usually come in at less than one percent interest rate, the government has chosen the expensive commercial loans principally to avoid the conditionalities and most importantly, accountability associated with multilateral loans.

Consequently, the government sold bonds of $4.8 billion and $5.4 billion in 2017 and 2018 respectively and will most likely sell some more to finance this year’s budget deficit.

But the federal government and the DMO have continued to rely on the low debt to GDP ratio to lull the country into a feeling of complacency that all is well whereas they have disgracefully led the country into another embarrassing debt trap. Data from the Office of the Accountant General of the Federation and the Budget Office for the period January to June 2017 indicate debt service to revenue ratio between January and June 2017 works out at about 70 percent and is set to increase to 82 percent by 2022, a figure quite high and unsustainable by global standards.

It bears repeating that even as Oniha expressed preference for multilateral agencies such as the World Bank and the African Development Bank, she is clearly ruling out talking to the IMF.

Sadly, Nigeria does not have a track record of judicious utilisation of loans and an IMF loan, accountability-wise, may have been the best for the country.