Much ado has been made about an impending global economic crisis, as the major economies of the world continue to falter amid increasingly tense economic relations between the US and China. Less attention has been paid to the impending economic crisis in Nigeria.
There is no gainsaying that the Nigerian economy is yet to fully recover from its 2016 recession. The lingering impacts of the slump in global oil prices in 2015 and the subsequent failure to address structural issues in the macroeconomy continue to ensure that the nation remains highly susceptible to fluctuations in the global economy. Furthermore, structural and policy challenges, particularly the nation’s large infrastructure gap, governance and institutional weaknesses and continued foreign exchange restrictions also continue to dampen long-term economic outlook. None of these are unlikely, however, to trigger the impending economic crisis, but its growing public debt levels.
Following the aforementioned oil price crash which decimated Nigeria’s revenues, the government resorted to incurring debt to make up for its revenue shortfalls and finance its expenditure. Since assuming office in 2015, President Buhari’s administration has added considerably to the nation’s debt stock, which is now over $80 billion.
Taking up debt is not bad, particularly when it remains within acceptable limits and used to finance economically viable infrastructure, but Nigeria’s current debt profile leaves much to be desired.
To get a clear picture of the situation, it is essential to go back in time to examine the nation’s history with public debt. Prior to 2005 when Nigeria benefited from massive debt relief as part of a programme coordinated by international finance institutions, Nigeria was Africa’s most indebted nation with $36 billion in external debt. Calls by local and international organisations for debt relief for the nation had gone largely ignored due to flagrant corruption and human rights abuses prevalent under the country’s military dictatorships.
After years of lobbying, the Obasanjo administration in October 2005 was able to secure debt relief worth $18 billion and an overall reduction of Nigeria’s debt stock by $30 billion. Following the debt relief, the long-term challenge for Nigeria was to consolidate the gains from the debt deal by pushing forward with economic reform and ensure long term debt sustainability.
Sadly, Nigeria has been unable to live up to this challenge as less than 15 years after the debt relief, the nation is back where it started with no tangible economic progress to justify its huge debt levels.
The authorities’ supporting argument for incurring such debt is that the nation’s debts remain within acceptable limit based on the debt-to-GDP metric. Based on this measure, it would be easy to conclude that there is no cause for alarm as Nigeria’s debt stands at 20 percent of GDP which is lower than the internationally defined threshold for Nigeria’s peer group.
Unfortunately, the debt-to-GDP ratio is not the most appropriate indicator for a country like Nigeria. Instead, the debt-to-revenue ratio and the share of debt service as a proportion of revenue are better indicators as they reflect the country’s realities. Neither of these two indicators paints a good picture of Nigeria.
With the nation’s debt stock valued at N25 trillion and N3.96 trillion in revenue as collated from the CBN in 2018, Nigeria’s total debt-to-revenue ratio stands at approximately 600 percent against an international recommended threshold of 250 percent. To put this in context, the Eurozone debt crisis was precipitated by similar debt-to-revenue ratios.
Furthermore, the debt service to revenue ratio for the year 2018 stands at almost 66 percent, a figure almost three times the recommended threshold for Nigeria’s peer group. In clearer terms, this implies that for every naira the government generated as income in 2018, more than 60 kobo went to servicing the nation’s debt, leaving little to build badly needed infrastructure and fulfil other obligations. In absolute terms, Nigeria spent N2.2 trillion in servicing outstanding loans in 2018 compared to N1.68 trillion on infrastructure, according to data released by the CBN.
The official rhetoric is that the government deliberately grew the country’s debt profile in order to foster a stronger economy by funding capital projects. However, this is only partially true. While it is incontrovertible that debt has been incurred to fund capital expenditure, significant portions of the incurred debt have also been used to fund recurrent expenditure, in particular civil servants’ salaries. Therefore, not only do the debt-to-revenue and debt service to revenue ratios ring alarm bells, it is apparent that these debts are not being used to fund economically viable projects.
The nature of the debts even gives additional cause for concern. While most developing countries take advantage of concessionary financing from international finance institutions, Nigeria’s debt profile is now increasingly made up of commercial debt, a situation which makes the Nigerian economy especially vulnerable to external shocks, such as a sustained drop in oil prices.
All of these do not paint a good picture of the economic future of Nigeria. The nation is currently expending bulk of its revenues on debt servicing, thereby leaving nothing for infrastructure development which in turn leads to the government taking on more debt to fund projects.
Furthermore, the International Monetary Fund (IMF) estimates that if left unchecked, debt could rise to almost 36 percent of GDP by 2024 and interest payments could make up 74 percent of revenue. This does not bode well for the future of the nation and we only need to look at countries like Venezuela, Greece, and Zimbabwe to see how dangerous a public debt crisis can be.
Therefore, the rising national debt volume must be tackled with urgency, perhaps starting with reducing government spending on recurrent expenditure. In the long run, there must be a concerted effort to diversify the country’s economy away from oil and take steps to widen and increase the revenue base. There is also an urgent need for structural and fiscal reforms. Although these reforms may inflict some political pain in the short run, they are necessary for economic growth and for long-term budget solvency.
If Nigeria fails to commence structural reforms aimed at addressing the nation’s ballooning debt problem, a fiscal crisis is inevitable. To be forewarned is to be forearmed.
OLANREWAJU RUFAI
Twitter – @LanreRufai_
