…Debt accumulation, other exports expose economy to global shocks –Expertsment
In this analysis of Nigeria’s debt trajectory from 1999 to 2022, PAUL OGBUOKIRI notes that the incoming administration faces the Herculean task of the debt entering unsustainable levels and bringing down the debt-to revenue ratio to manageable levels
External debt rise from $3.65bn in 2007 to $39.7bn in 2022
Nigeria’s debt history according to the Debt Management Office (DMO) shows that the country was indebted to external sources to the tune of $28.04 billion in 1999, of which $20.5 billion was owed to the Paris Club of creditors.
The DMO record also revealed that while the debt owed the Paris Club was paid in 2006, following a debt relief programme approved by the World Bank, the country’s total external debt came down to $3.54 billion and climbed to $3.65 billion in 2007 when former President Olusegun Obasanjo left office.
However, the country’s external debt profile continued through the administrations of Umaru Yar’Adua and Goodlock Jonathan to rise to $10.72 billion in 2015, a less than 300 per cent increase. The nation’s external debt reached $39.7 billion in September 2022, over 1,000 per cent.
During the period (1999 to 2007), the debt level of the Federal Government reduced from N3.55 trillion in 1999 to N2.42 trillion at the end of 2007.
The 8-year term of Obasanjo resulted in a dip in Federal Government’s local and foreign debt level, representing a 31.8 per cent decline.
The country’s exchange rate was between N98.02 to N116.8 to a dollar during the tenure.
Analysis of the figures showed that external debt decreased from $28.04 billion by 1999 to $2.11 billion at the end of 2007. However, the domestic component increased from N798 billion to N2.17 trillion within the same period.
The huge decline in foreign debt was a result of the substantial reduction following the pay-off of the outstanding debts owed to the London Clubs of Creditors in the first term of Obasanjo.
According to a World Bank report, in that period between 1999 and 2007, Nigeria had a fair share of economic boom, recording a positive growth rate. The report noted that the country had a stable economic growth during the period recording 5.02 per cent in 2000, 5.92 per cent in 2001, 7.35 per cent in 2003, 9.25 per cent in 2004, 6.44 per cent in 2005, 6.06 per cent in 2006 and 6.59 per cent in 2007.
Conversely, President Buhari’s administration has endured a turbulent economic growth, registering Nigeria’s first recession after 25 years in 2016, due to lower revenues from a drop in crude oil prices.
Data obtained from the World Bank showed that the GDP growth rate dropped from 2.04 per cent in 2015 before it dropped to -1.62 per cent in 2016. The growth rate increased to 0.81 per cent in 2017. It slightly increased by 1.94 in 2018 and increased by 2.24 in 2019.
This is as the country’s total public debt rose to N44.06 trillion ($83.8 billion) in the third quarter of 2022 as it continues with repayment burden.
Nigeria’s domestic debt has also grown to $56.72 billion, bringing the total public debt which comprises debt of the Federal Govern
Expertsment, the 36 States of the Federation and the Federal Capital Territory (FCT) to N44.06 trillion ($83.88 billion).
According to a recent press statement published on the website of the Debt Management Office, the total public debt stock rose from N42.84 trillion recorded in the second quarter of 2022 to N44.06 trillion in Q3, 2022.
This showed that there was a 2.85 per cent increase quarter-on-quarter and Nigeria acquired N1.22 trillion debt within three months.
The DMO said that the increase in public debt was due to new borrowings by the Federal Government to part-finance the deficit in the 2022 Appropriation Act, alongside new borrowings by sub-nationals.
It also noted that the total public debt stock consists of domestic debt of N26.92 trillion ($56.72bn) and external debt of N17.15 trillion ($39.7bn).
The statement read: “Total public debt stock, which comprises the total domestic and external debt stock of the Federal Government of Nigeria, all State Governments and the Federal Capital Territory stood at N44.06 trillion.
Huge cost of Nigeria’s rising debt
Nigeria’s rising debt since 2007 has raised concerns among analysts on the debt sustainability of the country amid dwindling revenue to meet the debt obligations to creditors.
With its current N44.06 trillion total debt stock as of September 2022, Nigeria spent N3.04 trillion to service external and domestic debts in nine months of 2022, representing an increase of 23.4 per cent Year-on-Year (YoY) from N2.46 trillion reported in nine months of 2021, the Debt Management Office (DMO) data revealed.
A breakdown of the N3.04 trillion debt service payments revealed a total N2.15 trillion was used by the Federal Government to service domestic debts in nine months of 2022.
The DMO numbers revealed that Federal Government’s debt service payments for domestic debts such as Treasury bill, FBN Bond, Green Bond and Sukuk bond borrowings increased by 23.5 per cent YoY in nine months of 2022 over the need to bridge the 2022 budget finance deficit.
On the external side, the Federal Government debt service payments with multilateral, bilateral, Eurobond and Diaspora Bonds also increased by 23.14 per cent in the period under review.
Experts have expressed worry as the Federal Government continues to obtain new loans from both local and external sources, despite growing debt profile and servicing cost. They said that the incoming government would have the Herculean task of halting the rising debt profile as there is the danger of Nigeria’s debt becoming unsustainable.
The Director-General, Debt Management Office (DMO), Ms. Patience Oniha, recently in Lagos, disclosed that the Federal Government, between 2015 and 2021, debt service payments was N14.86trillion and revenue generated was at N25.43 trillion.
She also disclosed that debt service payments between January and June 2022 stood at N3.09 trillion, while revenue was at N3.66trillion.
She, thus, stressed on the need for Nigeria to operate an efficient tax administration to tackle revenue challenges.
According to her, Nigeria needs to operate an efficient tax administration that would ensure greater compliance to remittances, devoid of all forms of evasions in the system.
Speaking, the CEO, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, said, “Although government tends to argue that the conditions were not a debt problem but a revenue challenge, the debt becomes a problem if the revenue base is not strong enough to service the debt sustainably. It invariably becomes a debt problem and possibly a debt crisis. Government actual revenue can hardly cover the debt service obligations.
“This implies that the entire capital budget and the recurrent expenditure may have to be funded from borrowing. This is surely not sustainable. The finance minister reported recently that in the first four months of 2022, debt service to revenue ratio was over 100 per cent.”
He further said that, “what is needed by the incoming government on May 29, is the political will to cut expenditure and undertake reforms that could scale down the size of government, reduce governance cost and ease the fiscal burden on the government.
“It is important to ensure that the debt is used strictly to fund capital projects, especially infrastructure projects that would strengthen the productive capacity of the economy. This is the position of the Fiscal Responsibility Act. Additionally, emphasis should be on concessionary financing, as opposed to commercial debts, which are typically very costly,” Yusuf said.
Nigeria’s actual debt could be N48.7trn
Wilson Erumebor, a senior economist at Nigerian Economic Summit Group, said Nigeria is a case where expenditure keeps rising, revenue not improving as expected, creating a wide fiscal deficit that is majorly financed by borrowing.
“While borrowing is required to support the economy, especially given the impact of the pandemic, what we need to be concerned about is how sustainable Nigeria’s debt position is,” he said.
“Debt has risen to N33.1 trillion as of March 2021, an increase of 162.7 per cent in the space of about five years.
“When we include AMCON’s liabilities and CBN’s ways and means, debt could amount to about N48.7 trillion, which is around 32 per cent of GDP.
Erumebor suggested that the Federal Government must improve efficiency, transparency, blocking leakages, and deliver value on public projects, despite limited resources.
“We must work towards unlocking many sectors and many areas where the country can earn revenue.”
In 2020, the International Monetary Fund (IMF) said Nigeria’s low debt-to-GDP ratio is highly vulnerable to shocks.
“Despite Nigeria’s relatively low debt level, liquidity-based indicators-driven by low revenue mobilisation-remain concerning, with the interest bill representing a high share of government revenue (but low relative to GDP),” IMF said in its country’s report for Nigeria.
Recently, market researchers at United Capital also expressed concern over the country’s rising debt sustainability risk. “The government has historically justified its rising debt profile by the compliant debt-to-GDP ratio of less than 30.0 per cent,” the research firm said.
“However, we reiterate our position that the Federal Government’s debt service cost as a percentage of revenue is a fairer reflection of the country’s debt sustainability position.”
It further said that at an overall public debt of N33.1 trillion ($87.24 billion), the implication remains that every Nigerian owes both local and foreign organisations N165, 500.
Increasing debt worries
While borrowing is required to support the economy, sustainable transparency and repayment plan are crucial.
Femi Oke, an economist, said Nigeria’s soaring high debt profile is not good for the country.
“The Nigerian government borrows in the worst possible way and in a very outdated manner. This causes a backlash to the government. Because Nigeria’s debts are not linked to any assets, we just go to the Treasury bill market and borrow, at any rate, that anybody wants to give you,” he said.
“There are many other countries who borrow more than what Nigeria is borrowing and don’t have any problem paying back. They borrow intelligently and efficiently, in a way that their debts service themselves.
“A more efficient way of borrowing is for the Federal Government to migrate all the debts to asset-linked debts. This means structuring the borrowing transaction like investments. There must be an underlying asset to which borrowers can use to recover the principal they gave the country plus profit.”
Vahyala Kwaga, senior researcher and policy analyst at BudgIT, said the level of borrowing – specifically in 2021- is the highest it has been in the last six years.
“The government is borrowing more, spending more and earning less revenue.
For context, the government budgeted about N5.37 trillion in revenue in 2020 but only earned a total of N3.42 trillion,” Kwaga said.
“There is also no commensurate rise in revenue to counteract the continuing rise in debt servicing. A casual look at the debt servicing level from 2015 to 2020 showed that the level has steadily increased since then,” he said.
“These amounts include debt servicing on interests for ‘ways and means’ and ‘sinking fund to retire maturing Loans,” Vahyala Kwaga added.
FG to stop bond sales in 2023
Nigeria’s debt trajectory is sustainable, the country’s finance minister said on Wednesday, adding that it planned to bring its key debt service-to-revenue ratio down sharply this year and would not borrow on the international capital markets.
Nigerian government spent 80 per cent of its revenue on debt servicing last year, a ratio that could rise to around 100 per cent, the International Monetary Fund estimates.
“Eighty per cent is not sustainable and our plan is that it is coming down to 60 per cent in 2023,” Zainab Ahmed said in a Bloomberg TV interview, adding that the country expected to produce 1.6 million barrels of oil a day this year.