Nigeria’s public debt profile will show over eightfold increase in the last 10 years when the central bank loan that President Bola Tinubu has been given the green light to securitise is included in the official data.
Lawmakers had on December 30 approved the request for the securitisation of the N7.3 trillion owed by the federal government to the Central Bank of Nigeria (CBN). Its inclusion in the debt office’s data will push the country’s public debt stock to at least N95.2 trillion.
Tinubu’s request came seven months after his predecessor, Muhammadu Buhari, converted N22.7 trillion borrowed from the CBN to 40-year bonds at 9 percent interest, with a three-year moratorium.
The debt owed to the central bank had surged to N26.95 trillion in May before the securitisation, which enabled N22.7 trillion to be added to the country’s public debt stock. The Debt Management Office said in September that the total public debt rose to N87.38 trillion in the second quarter of last year from N49.85 trillion in Q1. It increased to N87.91 trillion at the end of Q3.
Data from the CBN showed that the debt owed to it by the federal government was N4.36 trillion as of June last year.
Tinubu, in his letter to lawmakers in December, said the outstanding borrowings from the central bank stood at N7.3 trillion, an indication that his government took out N2.94 trillion loan from the CBN in six months.
The law allows the central bank to lend to the federal government through Ways and Means Advances, a loan facility used to finance the government in periods of temporary budget shortfalls subject to limits imposed by law.
The CBN overdraft is not included in the country’s public debt stock, which comprises the debts of the Federal Government, the 36 state governments, and the Federal Capital Territory.
Nigeria has seen its public debt grow steadily to levels that have left many worried as government revenues remain low. Its debt-to-GDP ratio was increased from 25 percent to 40 percent in 2021.
“I think we are getting to a very concerning stage – a stage where all of us need to be a little bit worried about the rising public debt because there are at least two implications,” Adeola Adenikinju, president of the Nigerian Economic Society, told BusinessDay.
“Whether we like it or not, there is some crowding out effect that is taking place. The more public debt we have, the less will be available for private sector investment,” he said, adding that it could also lead to an increase in borrowing costs for businesses.
He pointed out that interest payments had continued to take a big bite out of government revenues in recent years.
Debt service costs gobbled up 96.3 percent of government revenue in 2022, up from 83.2 percent in the previous year, according to the World Bank.
In 2022, debt service was N5.66 trillion, representing 40 percent of aggregate expenditure and 64 percent of revenue, Atiku Bagudu, minister of budget and economic planning said while presenting the highlights of the 2024 budget proposal.
He said the debt service cost exceeded budget by N1.68 trillion mainly due to interest on Ways and Means of N1.89 trillion and generally higher interest rates on borrowings.
“In the long term, what we need to do is to find a way of growing government revenues and to also pursue alternative sources of financing and capital spending. The reality is that the government revenue to GDP ratio is very low in Nigeria,” Adenikinju said.
The professor of economics said the government must be efficient in its usage of debts, adding borrowing from the CBN should be done without violating the law.
Bismark Rewane, managing director of Lagos-based Financial Derivatives Company Limited, highlighted the need to question the impact of the country’s mounting debt pile on economic growth.
“As your debt is increasing, your GDP should be increasing. Therefore you are producing more, you are employing more people and you are investing more. What we have seen is a kind of stagnation in growth and an increase in debt; so it raises the question: what did you use your debt to fund? That’s a big question,” he said in a phone interview.
GDP growth stood at 2.54 percent in the third quarter of last year, compared to 2.51 percent in Q2 and 2.31 percent in Q1.
Government revenue will be low if there is no economic growth, Rewane said.
“The way to increase tax revenue is to make its collection more efficient and block loopholes, not to increase it. If you increase the tax rate, it will be a disincentive for investment,” he added.
Last week, Wale Edun, minister of finance and coordinating minister of the economy, said after the signing of the 2024 budget that the government would rely less on borrowing and more on revenue.
“We are bringing order to government borrowing, so ways and means is being eliminated by taking the funding that is required from the market, as opposed to from printing money by the central bank,” he said.
David Omojomolo, Africa economist at London-based Capital Economics, described the plan to stop using CBN loans to plug budget deficits as “a good thing”.
“Deficit monetisation greatly inflated the money supply in the economy, contributing to the current high inflation and pressure on the naira,” he said on Friday.
While assessing public debt risks in Africa in a recent note, he said for countries, including Nigeria, that have borrowed significantly in local currency, higher borrowing costs are the main threat.
“Yields on local currency bonds have risen across much of Africa since the start of the year, which is likely to push up debt servicing costs as old debt is rolled over and new debt is issued,” Omojomolo said.
Across the continent, further fiscal consolidation will be needed to stabilise debt-GDP ratios and place public finances on a sustainable path, according to him.
“High inflation has raised fears that further austerity will stoke social unrest. Nigeria and South Africa have recently outlined fiscal plans, which imply debt burdens are set to rise rather than fall,” he added.
Nigeria’s inflation rate quickened to a new 18-year high of 28.20 percent in November, exacerbating poverty in Africa’s most populous nation.
A few days ago, former President Olusegun Obasanjo decried the debt levels in Nigeria and other African countries.
“With the level of mismanagement of the previous debts written off for the country, it will be almost impossible for any administration to get a similar gesture in the continent.” he was quoted in a statement as saying at an event. “The coming generations will have no choice but pay the current debt being incurred by different countries on the continent.”
