Nigeria’s public debt: Matters arising
Nigeria’s Debt Service to Revenue Ratio has elicited concerns around Debt sustainability in recent times. While such concerns are valid, the missing question in the argument is: How did we get here? The simple answer is that for many decades, Nigeria has relied on one major income stream (crude oil) and borrowings to finance its operations.
The limited success in the past to grow non-oil income is evident in Nigeria’s susceptibility to volatilities in crude oil prices and production, as well as, its low Revenue to GDP Ratio. Nigeria’s weak revenue position becomes clearer when compared with other countries. A recent report by the World Bank – “Nigeria Development Update- November 2021”, stated that “the Consolidated Revenues in Nigeria continue to be among the lowest in the world (6.5 percent of GDP in 2020) and heavily reliant on oil”.
According to the World Economic Report of October 2021, Nigeria ranked the third lowest in terms of Revenue to GDP ratio out of 196 countries in 2020, only behind Yemen (195th) and Somalia (196th). Nigeria’s Revenue to GDP Ratio also compared less favourably to the average for sub-Saharan African countries of almost 20 percent and 30 percent for oil exporters. The low revenue base has been responsible for recurrent Budget Deficits (from₦1.6 trillion in 2015 to₦6.4 trillion in 2021) that have been primarily funded by borrowings, thus raising Debt Stock levels and Debt Service.
Recent statements from various quarters give the impression that the administration of President Muhammadu Buhari, GCFR has embarked on a large and uncontrolled borrowing drive. Such claims refuse to recognise some of the peculiar challenges faced by this administration since 2015. First, in 2016, Nigeria slid into a recession following a crash in global crude oil prices. As a result, the Government borrowed largely to invest in infrastructure in line with the Economic Recovery and Growth Plan (ERGP) which aided a quick exit from the recession in 2017, placing the country on a recovery path.
Q: One of the driving forces behind the Government’s borrowing is the commitment of the current Administration to infrastructural development
Also, in 2020, Nigeria faced another economic recession, this time on account of the COVID-19 pandemic which triggered significant fiscal responses including expenditure for the health sector and the establishment of the ₦2.3 trillion National Economic Sustainability Plan (ESP), among others to support key sectors and individuals worst hit by the pandemic. These were aside huge expenses arising from security challenges in the country.
Although the level of Borrowing has increased, Nigeria’s Debt to GDP Ratio of 22.32 percent as at September 2021, remains one of the lowest among peer countries such as Kenya (66 percent) and Ghana (81 percent). It is also within the recommended limit of 55 percent by the World Bank (WB) and the International Monetary Fund (IMF) for countries in Nigeria’s peer group. The fact remains that countries borrow; data for the year 2020 shows that even well-advanced countries have higher Debt to GDP Ratios compared to emerging countries and Nigeria: United States of America (108 percent), United Kingdom (97 percent), Japan (259 percent) and Canada (118 percent).
While these countries generate revenues from diverse sources that are commensurate with the size of their economies as reflected in the Revenue to GDP Ratios (United States of America: 30.6 percent, United Kingdom: 36.6 percent, Japan: 34.8 percent and Canada: 41.9 percent), they still borrow. Whilst these countries have high Revenue to GDP Ratios which makes their debt sustainable, Nigeria has low Revenue to GDP Ratio. Nigeria’s Revenue to GDP Ratio is even lower than those of Ghana and Kenya with Ratios are 12.5 percent and 16.6 percent respectively. These bring to the conclusion that Nigeria’s problem with Public Debt is actually its relatively low revenue base which makes its Debt Service to Revenue Ratio high.
One of the driving forces behind the Government’s borrowing is the commitment of the current Administration to infrastructural development. Since 2015, critical infrastructure projects such as the construction of major roads, bridges and railway lines have been executed through borrowings, many of which are concessional. Examples of these projects abound all over Nigeria. The benefits of these capital investments are evident in the ease of movement of goods and people, job creation especially in the construction sector that has the capacity to employ millions of Nigerians and an overall multiplier effect on the economy.
From policy actions and initiatives, it is obvious that the Government itself is committed to ensuring that Public Debt is sustainable. While the Medium Term Expenditure Framework 2022-2024 shows that the Government will still borrow, the current Administration is actively addressing the issue of rising Debt levels and Debt Service in two major ways: Implementing revenue-generating initiatives and encouraging private sector participation in infrastructure development to reduce the level of New Borrowings and Debt Service to Revenue Ratio.
The Debt Management Office (DMO), the agency responsible for managing Nigeria’s Public Debt has stated that this should be the desired path for debt sustainability. In a statement made by the Director-General, Patience Oniha at a public forum, “The way to make Public Debt sustainable and reduce New Borrowings is for the FGN to grow Revenues and embrace Public-Private-Partnerships”
In terms of revenue generation, two major initiatives have been introduced and implemented by this Administration: The Strategic Revenue Growth Initiative (SRGI) and the annual Finance Acts since 2019.The objectives of the SRGI are to improve revenue collection, manage expenditure and achieve fiscal sustainability. The annual Finance Acts have been targeted at reforming tax provisions, and increasing revenues for the implementation of the Government’s budget. The SRGI and the annual Finance Acts are expected to grow Nigeria’s Revenue to GDP Ratio from the current level of 9 percent to 15 percent by 2025.
With the buy-in of the National Assembly which recently mandated revenue-generating agencies of the Government to grow revenues aggressively, the 15 percent target is achievable. Very close monitoring of implementation including compliance is however required to achieve this target.
To reduce the need for direct borrowing, the Government has embraced Public-Private-Partnerships (PPPs) to develop infrastructure. Some Government initiatives are the Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme, Presidential Infrastructure Development Fund and the Infrastructure Corporation of Nigeria. Furthermore, to address the challenges experienced by potential investors, the Federal Government issued a Circular in the year 2020 classifying roles and responsibilities for the execution of PPP projects. The DMO has since aligned with the concept of borrowing for infrastructure when it introduced the Sovereign Sukuk in 2017. As at date, a total of ₦612.577 billion has been successfully raised through the issuance of Sukuk, out of which ₦362.557 billion raised between 2017 and 2021 has been deployed to critical road projects across the six (6) geopolitical zones in Nigeria.
The SRGI and Finance Acts appear to be making a positive impact on non-oil revenue. According to a presentation by the Budget Office of the Federation on the 2021 Budget Implementation, the FGN’s share of Non-Oil Tax Revenues between January and November 2021 rose to ₦1.62 trillion from ₦1.26 trillion in 2020and was 118.8 percent above the target in the 2021 Appropriation Act. FGN Independent Revenues was at an all-time high of ₦1.1 trillion between January and November 2021.To maintain this trajectory, incremental income is expected under the Finance Act 2021 from the introduction of new taxes such as the “sugar tax” on carbonated drinks which has a potential to drive additional taxes of over ₦28 billion annually, taxation of E-Commerce business by non-resident companies and 5 percent capital gains tax on shares disposal transactions where gains exceed ₦500 million in 12 calendar months, among others.
In conclusion, the FGN’s revenue base is improving on account of ongoing efforts by the Government. Not only should this be sustained by the Government, they must be embraced and supported by the public to achieve the desired results. Similarly, the development of infrastructure should not be discontinued; rather, PPP arrangements should be more aggressively pursued. As these initiatives are implemented, the need for New Borrowings and Debt Service to Revenue Ratio will moderate to more comfortable levels.