Africa’s biggest economy is fast earning a reputation of consistently using most of its income to service debts, a trend that makes it difficult for the government spending to stimulate the economy without private capital.
Between January and June 2020, Nigeria channelled 96.9 percent of its revenue into debt service, which was up by almost half from 54 percent for the entire period of 2019.
This is as 99 percent (N943.12bn) of government revenue (N950.56bn) was used to service debt incurred between January and March 2020, as reported by the Medium Term Expenditure Framework (MTEF) and Fiscal Strategy Paper (FSP) of the Budget Office of the Federation.
This puts the total debt-service to revenue ratio at almost 95 percent (or N312.81bn) for the months of April, May and June combined.
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However, the total generated revenue of N950.56 billion in first quarter (Q1) 2020 was 50 percent short of its prorated budget of N1.9 trillion, a sign that Nigeria’s problem is more a revenue one than a debt one.
Of the N943.1 billion in Q1 2020, servicing of domestic debt was N609.13 billion (63% of debt service) while servicing of foreign debt stood at N129.51 billion.
Similar trends have prevailed in recent years as domestic debts always bear the brunt of public debts with foreign debts drinking up a smaller portion.
Source: CBN and Budget Office of the Federation
The latest debt figures by the Nigerian Bureau of Statistics (NBS) show Nigeria’s foreign and domestic debt stocks at an all-time high of $85.89 billion and N31 trillion, respectively, as at June 2020.
This is an 8.3 percent hike from $79.3 billion and N28.63 trillion in March 2020.
When compared with Nigeria’s last recession in 2016, which had $11.41 billion and N14.02 trillion for foreign and domestic debts, respectively, the current figures for June 2020 show much precarious levels at 653 percent and 121 percent jump.
Of these figures, the bulk came from Nigeria itself while the lesser portion is derived from aggregate external debts.
Specifically, the years 2018 and 2019 saw Nigeria’s share of national debts take up an average of 67.6 percent while external debts barely took 32.4 percent of the total public debts.
Also, striking trends were observed of Lagos topping the charts with remarkable debt profiles of 35.6 percent, 5.64 percent, 5.04 percent by the year end of 2017, 2018 and 2019, respectively.
This was closely followed by Kaduna, Edo and Cross River states who accumulated escalating debt stocks within these 3 years after Nigeria’s last recession.
However, by Q1 and Q2 2020, in addition to Lagos, Cross River and Rivers states, Akwa Ibom and Delta states joined the list of Nigerian places with the highest debt profiles.
Source: NBS
fiscal policies.
Is borrowing really the way forward?
According to Ifeoluwa Ogunrinola, a monetary and financial economist from Covenant University, “naturally, borrowing is part of policy options as an external source of financing the budget.
“As such, borrowing itself is not the challenge but interest and debt service on debts that become burdensome is where the real problem lies.”
Ogunrinola noted, “Nigeria has two major problems when it comes to borrowing: the cost of servicing debts is much greater than the debt itself, since government does not necessarily borrow at concessionary rates; and funds borrowed are hardly used judiciously.”
So, it appears that borrowing more at the moment is not the viable solution and should be discouraged.
In fact, Ogunrinola proposed that “it would be helpful for international organisations to blacklist Nigeria or heighten the prerequisites for borrowing to discourage the Nigerian government from borrowing and enhance the sincerity of foreign policy advisory and technical services.”
Ogunrinola said that “rather than exogenous borrowing, there are several endogenous sources of generating income, mainly immediate and ultimate courses of action where immediate solutions are needed for speedy results, while ultimate answers are subject to time lags.”
What really are the viable options to move Nigeria out of recession?
Ordinarily, the vital step should be effectively channelling borrowed funds into productive sectors that are able to yield enough revenue to eventually pay off debts and associated interest payments.
However, given that Nigeria has been unable to sustainably achieve this over the years, as evidenced by available statistics, there are other viable alternatives for the Nigerian government.
“First, opening up the borders to boost trade flows and ease the pressure on the foreign exchange market such that there is increased market for naira and greater demand to bridge the limited production capacity,” said Ogunrinola.
Reopening the borders will reduce the pressure on the few available goods and subsequently reduce inflation levels.
Also, Ogunrinola mentioned that “the cost of generating taxes is more than the tax itself due to tax leakages, avoidance and bribery; and this can be mitigated through encouraging more of moral suasion and tax incentives for people to appropriately declare profits and pay taxes”.
Such steps to plug in holes in Nigeria’s tax revenue generation will help to save up more income that will be useful to fund its massive expenditure.
He noted that “reducing the excesses in the cost of running government to complement blocking leakages in non-tax revenue systems such as ensuring proper administration of the immigration and customs service, will also go a long way in getting more funds accrued to the Nigerian government.”
For instance, in Q1 2020, customs collection was N97.47 billion, representing only 60 percent of the targeted revenue, with potential to achieve much more.
He proceeded to emphasise the need for “unifying the exchange rate windows,” for which the Central Bank of Nigeria has started the process, but was yet to finalise things.
These steps will be highly instrumental in boosting the confidence of external investors and stirring up immediate positive effects that will help in pulling the Nigerian economy out of recession as well as sustaining the development through consistent monetary and fiscal policies, he said.
