Nigeria’s total public debt stood at N38 trillion or $92.626 billion as of September 2021. The bulk of these loans is to be sourced from external sources such as the World Bank, Islamic Development Bank, China Exim Bank, African Development Bank Chinese Africa Development Fund and International Fund for Agricultural Development.
A dig into the components of these loans reveals that $5.8 billion was allocated for grid modernization and expansion programme, $290 million for malaria project, $700 million for sustainable water, hygiene and sanitation project while $786,382,967 is for the Gurara phase 2 project amongst many others.
In the year 2020, Nigeria earned a total of N3.93 trillion while debt servicing gulped a total of N3.26 trillion which implies that the bulk of the nation’s revenue is being consumed by debt servicing.
The relatively poor economic performance of the country despite the huge loans that have been received by both past and present administrations has generated a lot of concerns and have prompted a lot of observers to ask whether such loans are doing more harm than good to Nigeria owing majorly to the fact that Nigeria continues to borrow with no major source of financing the loans apart from the sales of crude oil, which is now appearing to be no longer sustainable, while another school of thought believes that continuous borrowing and debt servicing will lead to tying up of assets that could have otherwise been used for investment in quality infrastructure, education, health, environmental management, or other activities which have long-run benefits for sustainable development.
While on the positive side, others believe that it is eminent to borrow from external sources as the country’s revenue is no longer sufficient to fund indigenous projects. While it might not be entirely bad to source for external loans in addressing the nation’s economic challenges, the government has to critically examine and address some of the issues of concern identified below:
Over-reliance on external funds might disrupt domestic innovation:
In 1950 South Korea had a lower per capita GDP than Nigeria. But by pursuing macroeconomic reforms, high savings, investing in education and basic social services, and opening their economies to the global trading order, South Korea, now one of the “Pacific Tigers” have been able to lift itself out of poverty into wealth with very little help from the World Bank. Nigeria like many countries in Africa, however, has relied primarily on multilateral assistance from organizations like the World Bank while avoiding fundamental macroeconomic reforms, with deplorable but predictable results. Critics point out that Nigeria has borrowed more than $85 billion with little to show for it. Nigeria received $637 million between 1965 and 1995, yet its per capita GNP had fallen, in real terms, more than 50 percent during that time. In the same period Singapore, which received one-seventh as much World Bank aid, had seen its per capita GNP increase by more than 6 percent a year.
Wrong justification for external borrowing:
One of the arguments put forward by the Nigerian government for its incessant borrowing is that its ratio of debt to GDP is still small, therefore, there is always room for more borrowing. In the words of Uche Orji, the managing director of Nigeria’s Sovereign Investment Authority, “We are not even borrowing enough relative of our GDP size”. However, theories aside, the fact remains that GDP will not be used to repay back the loans because GDP is not profit. In other words, the fact that a country’s revenue is rising does not imply that the country is on a surplus side. Continuous borrowing on the ground that Nigeria’s GDP is growing will not augur well for the nation’s sustainable development.
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Increased debt burden for the future generations:
Going by the revelation of the government to pay back the loans in 20 years’ time, this implies that the bulk of the payment burden will not be borne by the present government. The implication of this is that future administrations might be overwhelmed with the payment of interests that comes with these loans bearing in mind that Nigeria can no longer depend on the revenue from crude oil due to the highly volatile nature of global oil prices. Should there be a further plunge in oil prices, how will the government pay back these loans?
Also, it is no longer news that there are now several alternatives to crude oil and its by-products as a result of the increased rate of innovation which has consequently reduced the demand for crude oil. This implies that if the government intends to pay off these debts using the revenue from crude oil, the level of savings might not be enough to sustain the country.
In the words of Ike Brannon, a researcher for Forbes, “If Nigeria does not get its financial house in order, it will undoubtedly face some sort of fiscal crisis in the next few years”.
Lack of accountability and mismanagement of past loans:
A dig into the past reveals that some of the projects these loans are being collected for have already been awarded without any execution. This implies that past and present administrations need to provide answers on what went wrong. Should these loans be finally approved, what is the tendency that they won’t be mismanaged especially going by the increasing level of corruption in the country.
Mismatch of loans with budget:
It is prejudicial for the Nigerian government to present some figures without expecting questions to be raised. For instance, part of the loan components includes an allocated value of $290 million for malaria which amounts to about N164 billion whereas the budget for the entire health sector of the country for the year 2022 is just N194.6 billion. This mismatch largely remains questionable especially considering the fact that despite government interventions and allocations by both past and present administrations, Nigerians have not felt the impact as many still find it difficult to access affordable and quality health care as far as malaria is concerned. Government cannot allocate only N194.6 billion to the entire health sector and allocate N164 billion just for malaria projects.
Risk of forfeiting national assets:
While alternative borrowing from China may not be an entirely bad idea, Nigeria needs to consider the negative consequences that this will leave on its economy if it is not able to repay back the loans. Chinese borrowing usually comes with strings attached to it and that is why China only prioritizes resource-rich countries at the detriment of countries that have little natural resources. There is no point borrowing for a particular project if such project will eventually be handed over to China following their inability to repay back the loans.
Also, there are various cases of debt trap where China has taken over state-owned properties of owing nations following the inability of the borrowing nations to pay back the loans. Evidence gathered from “Brookings” revealed that in Sri Lanka, the Chinese government converted their debts into a 99-year lease of their major port and its surrounding land. Also, around 72 percent of Kenya’s external debt which is around $60 billion is owed by Kenya to the Chinese government.
The borrowing clause is that should Kenya refuse to pay the loan, the Mombasa port will be ceded to China “The Economic Times” revealed. Also, in the year 2004, Angola completed a loan deal of $4 billion with China in exchange for the acquisition of multiple oil blocks.
External loans continue to play an integral role in helping countries reduce poverty and improve the well-being of their citizens, however, a country must be careful to ensure that too much borrowing doesn’t compound to more economic crises. Before external loans can help Nigeria, certain factors must be put in place.
Firstly, the central bank has a significant role to play in ensuring domestic macroeconomic and financial stability. Given the sharp increase in fiscal deficits and public debt ratios in Nigeria and its likely persistence in the medium term, close coordination between the central bank and the government is essential to ensure adequate liquidity and stability in the economy.
Also, Nigeria must cut down its cost of governance through restructuring; while efforts must also be put in place to ensure that funds meant for developmental projects are not diverted nor embezzled by corrupt officials.
