Debt servicing seen eroding govt’s scarce revenue, as total public debt hit N121 trillion

As the Nigerian government continues to struggle with its ‘scarce’ resources, Experts have raised concerns about the increasing public debt portfolio which stood at over N120 trillion as of March 2024, stating that the amount needed to service such debt will consume a huge part of the government’s scarce resources.

According to the Debt Management Office, the total debt owed by both the federal and state governments rose to over N121 trillion as of March 2024. This is a 19.8 per cent and N24 trillion increase within three months from the N97 trillion debt profile as of December 2023.

The total debt was made up of external debt at $42 billion (N56 trillion) and domestic debt at N65 trillion ($49 billion).

Experts who spoke to BusinessDay on the increasing debt profile, stressed the need for the government to optimize revenue generation, adding that the high debt will lead to increased cost of servicing the debt which will affect the government’s ability to fund other crucial sectors.

According to the Central Bank of Nigeria, the Federal Government spent a total of $15.55 billion on debt servicing between 2019 and 2024.

In 2019, Nigeria paid $588.33 million in debt service between January and May, while the payment for 2020 was $5.40 billion. This increased to $2.02 billion in 2021, $2.34 billion in 2022, and $3.43 billion in 2023. Also, a total of $2.18 billion was used to service debt between January and May 2024.

Also, Wale Edun, the Minister of Finance and Coordinating Minister of the Economy, who appeared before the Senate Committee on Appropriation last week, said the federal government is up to date on debt service payments and has paid $700 million in debt services for 420 national development agencies.

Vahyala Kwaga, Senior Research and Policy Analyst at BudgIT Nigeria, in a chat with BusinessDay, said that the high debt profile is a concern, as he noted that Nigeria’s relatively low revenue will continue to be used to service the debt.

This, he said, means that revenue that should be used to implement critical capital projects in health, education, water, and sanitation among others, will be directed towards the repayment of debt.

According to him, the depreciation of the naira has created a situation where foreign currency-denominated debt has considerably increased, hence the nation is paying more naira for every single unit of foreign currency borrowed, both for the principal sum and interest. “This has no positive benefit to an already constrained country revenue profile. The government must, as a matter of urgency, improve the quality of funds usage and reporting on loans.

“The implication of the rising debt profile is that scarce revenue that ought to be used for critical capital infrastructure needs (of which the Tinubu administration claimed would require N35 billion naira yearly, from 2024 to 2040) will not be sufficient. It will put pressure on the existing revenue and force the government to forgo important investments in human and infrastructural development.,” he said.

Noting that a considerable amount of Nigeria’s foreign debt is Eurobonds with higher interest rates compared to bilateral and other multilateral sources, Kwaga said that the government can consider borrowing from other sources, stating that this will reduce the total amount of money being used to service the debt.

He also stressed the need for the domestic debt component to be modified, “that is to say that Infrastructure Bonds or Sukuk Bonds should be used far more than regular FGN Bonds, this is because the conditions for the issuance of FGN Bonds do not require that the collected funds be used for any project. Hence the government has wide latitude to use the funds for anything that may not have a developmental purpose.

“On the other hand, the Infrastructure Bonds or Sukuk Bonds have defined conditionalities specifically for infrastructure purposes and as such are better for development. Also, the government must transparently report on the impact and final destination of the funds. Where this happens, the public will be aware of how the funds are used and the government will be able to demonstrate that it has ensured value for money in developmental projects.”

Also speaking with BusinessDay, Muda Yusuf, the Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE) noted that even though the majority of the debt is legacy debt, the debt servicing was of great concern as it affects the resources available to be spent in other sectors.

According to him, the federal government through the debt management office is working to ameliorate the impact on the economy, by focusing more on domestic borrowings.

He said, “The issue with these debts is that more money will be required for servicing, and this will deprive other sectors of government’s resources. The bulk of the debts are legacy debt, borrowed by the past administrations and we cannot walk away from them, and the current administration is working to see how they can service these debts.

“There is however a need for the government to cut down expenditure, and optimize its revenue generation to ensure a stronger sustainability parameter. These parameters which include the debt-to-GDP ratio, and debt service-to-revenue ratio must be reduced.

“We need to ensure that these borrowed funds are used to build the capacity of the economy to grow and generate the needed revenue to service the debts.

We need to ensure that these funds are used to drive infrastructural development, tied to infrastructure projects that can strengthen the nation’s production capacity and help generate more revenues for the government.”

President Bola Tinubu had insisted that the country could not continue to service its debt with 90 per cent of its revenue, noting that the country was heading for destruction if that continued.

The President said, “Can we continue to service external debts with 90 per cent of our revenue? It is a path to destruction. It is not sustainable. We must make the very difficult changes necessary for our country to get (wake) up from slumber and be respected among the world’s great nations.

“To build a great nation, we must make bold decisions; even though it may be painful, it is not about you and me. It is about generations yet unborn.”

For Okolie Joel, an Abuja-based economic analyst, the high debt profile increases the risk of default on loans, which could have severe consequences for Nigeria’s economy. Defaulting on debt obligations, according to him, could lead to a loss of investor confidence, a downgrade in credit ratings, and limited access to international markets. This could further exacerbate the country’s financial woes and make it harder to secure future loans on favourable terms.

To address these concerns, Joel called for urgent measures to increase revenue generation, cut unnecessary expenses, and promote transparency and accountability in government spending. “Additionally, there is a need for better debt management practices to ensure that loans are used effectively and to avoid overreliance on external borrowing.

“Nigeria’s high debt profile is a pressing issue that needs to be addressed promptly to prevent further economic instability. By taking proactive steps to reduce debt levels and improve financial management, Nigeria can work towards ensuring a more sustainable and prosperous future for its citizens,” he said.

This has also raised questions about the impact of the subsidy removal, which the government through Wale Edun, the Minister of Finance and Co-ordinating Minister of the Economy in November 2023 said had raised the monthly federation revenue to an average of N1 trillion, in the first four months of implementation.