Nigeria’s worrying debt stock
A new report has shown that Nigeria’s outstanding public debt is worrying and could reach over 38 trillion naira by the end of 2021. The report also states that Nigeria’s debt portfolio, which was from 33.1 trillion naira in March 2021, increased by more than 17 percent. cent between the end of last year and this year. Despite the increase in the outstanding debt, it is worrying that the government has announced new borrowing plans in the external and internal markets. The Minister of Finance and National Planning, Ms. Zainab Ahmed, revealed that by the end of this year the outstanding debt could reach 38 trillion naira. However, some experts are of the opinion that it could be more than that and have even predicted that it will reach 40 trillion naira by December 2021.
Declining government revenues due to the volatility of oil prices in the international market will likely worsen the situation. And with less money going to the government for oil, it will be difficult to sustain escalating debt. Not so long ago, the World Bank warned that Nigeria would face imminent exposure to high debt risk due to failure to meet contractual obligations to its creditors. But the position of the global financial institution has been criticized by the Debt Management Office (DMO). Despite this official row, statistics show Nigeria faces a serious debt crisis unless the government prioritizes its borrowing plans and invests in productive sectors. In May 2021, Nigeria’s debt service-to-revenue ratio was 96%. This means that for every L1 earned, N0.98 is spent on debt service. In real terms, this means that around 90% of total revenue is spent on debt servicing, a situation that is unsustainable. The issue is not helped by the increase in overhead costs and the increase in the infrastructure deficit. It is the worst the country has seen in decades. And the economic consequences are dire because of the apparent absence of a definitive policy on how the government intends to effectively manage spending and reduce the costs of governance. The diversification drive, particularly in the non-oil sector, has reportedly paid little dividend due to growing insecurity across the country. In view of the rise in global interest rates, which has caused central banks in advanced economies to think about normalizing monetary policy, the costs of servicing debt on foreign loans will rise, thus pushing the debt of the country. Nigeria beyond the point of sustainability. Experts predict that Nigeria’s total debt stock could reach 40 trillion naira in the coming months after approval of the government’s plan to borrow an additional $ 6.2 billion. Between January and May of this year, the government reportedly spent 1.8 trillion naira on debt service. The figure represents 98% of aggregate income during the period, which is 44.6% lower than the projected income of 3.32 trillion naira for the period. COVID-19-related shocks weakened economic performance and the revenue target. In addition, little has been done to broaden the tax base in such a way that it does not affect the cost of living of citizens.
Undoubtedly, the worsening debt profile remains one of the challenges for the economy, especially since President Muhammadu Buhari came to power almost six years ago. Policymakers have not been creative enough in managing the nation’s debts. For example, from $ 18.89 billion he inherited in May 2015, the country’s outstanding debt rose to over $ 32 billion in December 2020. Nigeria has so far taken out loans worth $ 31.98 billion from the World Bank Group, the International Monetary Fund (IMF), the African Development Bank Group (AfDB) and others. It also has an outstanding loan of $ 11.6 billion from the International Development Association (IDA) and the International Bank for Reconstruction and Development (IBRD). In addition, Nigeria owes $ 4.0 billion to China, France, India and Germany. This represents 12.74% of the country’s external debt, estimated at $ 32.86 billion. In view of the looming economic crisis that will follow excessive borrowing, the government must borrow prudently and invest the loans in profitable businesses. While we are not against borrowing, we advise that such loans should be wisely used for projects that can pay them back. Excessive government borrowing is likely to put the future of the country at risk. If the relentless borrowing is not brought under control, Nigeria will enter another debt trap. To avoid over-indebtedness, there should be a moratorium on borrowing by federal and state governments. Unlimited borrowing is sure to hurt the economy.