Nigeria’s debt profile rose by a whopping N3.3trillion in just three months according to a report by the Debt Management Office, DMO, two weeks ago. Yet, the handlers of the Nigerian economy say this is no cause for alarm. Babajide Okeowo in this report takes a look at the scenario and how the country can overcome the situation.
On October 15, 2019, the Debt Management Office released the debt profile report of the country. According to the report, Nigeria’s debt stock increased by 3.11 per cent from $81.27 billion recorded in the first quarter of 2019 to $83.88 billion (N25.70 trillion) at the end of June 2019. Overall, total external debt stood at $27.16 billion. One thing, however, stood out, the debt rose by an astonishing N3.32trn in one year, which is almost a third of the country’s annual budget.
This development, according to experts, is worrisome. President of the African Development Bank, Dr. Akinwumi Adesina, remarked recently that Nigeria is currently using 50 per cent of its revenue to service its debts, compared to the average of 17 per cent for other African countries. This, he said, is unsustainable, adding that the situation is part of an economic malaise that has consigned millions of Nigerians to “multidimensional poverty” even as a few favoured ones continue to enjoy the nation’s wealth.
Also worried by Nigeria’s growing debt stock, members of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria had at the end of the 126th Monetary Policy Committee meeting of last month, noted that despite momentum increase in private sector lending, rising Nigeria’s public debt remains a headwind to economic growth.
“The huge concerns expressed in the last MPC meeting about the increases in total public debt remain unabated. Based on the Bond Issuance Calendar of the Debt Management Office (DMO), there were three additional FGN Bond Auctions in July, August and September to raise money to part-finance the 2019 Federal Budget while additional Issuance of Eurobond is expected in the late part of 2019 or early 2020. As the threat of debt vulnerability continues, a coordinated domestic revenue expansion with simultaneous fiscal prudence as suggested in the last MPC meeting remains the key to addressing the weak fiscal position of the economy,” the MPC noted.
An even more alarming statistics were given by civil society organisation, BudgIT. According to Atiku Samuel, Head of Research at BudgiT, Nigeria’s debt is larger than what’s reported by the debt office.
“What you see at the Debt Management Office is just a fraction of Nigeria’s debt, there are special accounts that are dedicated by law, but unfortunately the federal government has been taking funds from [them] to meet its budgetary obligations”
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Samuel further said that the government had been drawing from “funds like the ecological fund, even borrowing from the excess crude account. Another big component is the debt to contractors and the overdrafts it takes from the central bank – which is now about N4 trillion – and there are also judgment debts,” he lamented.
These, he said, would add to the debt “if you look at debt from the globally accepted definition, as these are still obligations to the government” he added.
Multilateral loans from the World Bank Group, African Development Bank at the end of June 30, 2019, stands at over $12bn, commercial loans from Eurobonds and Diaspora Bonds stand at over $11bn while bilateral loans from Exim Bank of China, Exim Bank of India, The Agence Française de Développement, AFD and the likes of them stands at $3.27bn. In all, the country’s debt profile stands at an astonishing $83.88 billion.
Analysts are, however, worried that most of the money being borrowed by the government may not have been put into productive use. Questions are being raised, for instance, on the proceeds of bond sales, from which the country has reaped bountifully in recent years. Other areas for which money has been borrowed and little done are electricity, water and road infrastructure.
“They have borrowed quite a bit, but where is the money being spent?” asks Andrew Roche, managing partner of Finexem, a Paris-based financial consulting firm. He worries that the government has been using borrowed cash to patch up holes in budgets rather than investing in infrastructure or industry, or in efforts to diversify the economy.
Nigeria has been among the big beneficiaries of a global hunt for yield. For instance, the country sold its sixth eurobond November last year, raising $2.9 billion in maturities of seven, 12 and 30 years in an issue that was more than three times oversubscribed. On April 25, the government raised 100 billion naira ($326 million at the official rate) in an auction that included a debut 30-year local currency bond that was four times oversubscribed.
In a presentation to investors in Washington DC, United States of America last month, Finance Minister Zainab Ahmed stressed that Nigeria’s debt while it has risen in recent years, was still equal to just 19 percent of gross domestic product in 2018. That is well below the average for emerging markets of just under 50 percent of GDP, according to the Institute of International Finance.
But the same presentation shows that the amount spent on servicing government debt, while it has fallen as a share of the government’s gross revenue collection, has risen to an alarming two-thirds of revenues retained by the federal government after it has allocating funds to the states.
The question being asked by many is, where is the money going to?
Nigeria’s debt profile, disaster waiting to happen- Experts
Ike Brannon, a senior fellow at the Jack Kemp Foundation posited that Nigeria’s biggest economic problem is her growing public debt.
“Nigeria’s biggest economic problem, though – and the issue that requires real political acceptance from Buhari’s new government – is the country’s growing public debt. Since assuming office in 2015 President Buhari’s government has added considerably to the nation’s debt, which now exceeds $85 billion. In essence, the nation’s debt is about where it was in 2005-06, just before Nigeria benefited from massive debt relief as part of a program coordinated by the Paris Club, IMF, World Bank and the African Development Bank. To have squandered the debt reduction in just fourteen years and have no tangible economic progress to show for it is beyond disappointing. Another problem is that having a plethora of Nigerian banks holding substantial portions of Nigerian sovereign debt represents a systemic risk” he said.
He added that if the country does not put her financial house in order, it will undoubtedly face some sort of fiscal crisis in the next few years.
“If Nigeria does not get its financial house in order it will undoubtedly face some sort of fiscal crisis in the next few years. In the long run, the Buhari government must make a concerted effort to diversify the country’s economy away from oil as well as take steps to widen and increase the revenue base, and it should look to settle its major contingent liabilities sooner rather than later,” he added.
On his part, Paris-based sovereign debt expert, Andrew Roche has pointed out that while the country’s debt as a proportion to GDP is a reasonable twenty per cent, debt servicing costs make up fully two-thirds of retained government revenue, a startlingly high figure and a situation government goes some lengths to de-emphasize.
“Without an honest and frank government acceptance of the situation, Nigeria’s chances of escaping its self-inflicted debt trap are vanishingly small,” he said
FG borrowing more than they have the means to repay- Stakeholders
According to Mr. Gabriel Idahosa, the Vice President of the Lagos Chambers of Commerce and Industry, LCCI, though the country’s debt to equity ratio gives it room to borrow more, borrowing was not going to be a problem, but the real problem lies in the ability to repay the debt.
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“What the government has been doing is to base the budget significantly on debts rather than revenue, the revenue capacity of the budget is at about 30 to 40 per cent, so a lot of the budget is predicated on borrowing, so as long as you keep borrowing, you are going to have your debt profile going up higher and higher which translates to having to borrow more and more’
‘‘The government might be saying that our debt position relative to the Gross Domestic Product, GDP is not much to worry about at this time. The international benchmark for debt-equity is about 40 per cent, if you are at less than 40 per cent, then you have room to borrow more. This is why the government is saying that they have enough room to borrow, but that presumes that they are also able to generate enough revenue to meet the debt repayment obligation. The real concern for Nigeria is not that the debt to equity ratio is high but the fact that we do not generate enough revenue to meet the repayment obligation of those debts significantly. As long as we continue to maintain the level of our current revenue generation as it is, then our capacity to repay will be going down,” he said.
Similarly, the Managing Director of Kairos Capital, Sam Chidoka lamented that Nigeria’s debt sustainability is precarious.
“One fact that Nigeria has always looked at is our debt to GDP ratio which is in and around 20 per cent and still looks good, but one thing which should worry us as a country is the debt to revenue. In terms of debt to revenue, we are not doing too well. In the situation that we are using 63 per cent of our revenue to service debts, this is precarious. The challenges are numerous, firstly, we have a revenue challenge, we are not making enough money, and we need to fix that. Secondly, we have an infrastructural gap that needs to be funded and of course, our ballooning debt situation,” he said.
Debt level not worrisome -FG
For the umpteenth time, handlers of the Nigerian economy have reassured Nigerians that the debt profile of the country is not as precarious as it is being made to look.
Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, had in August said that the country did not have any debt challenge but a challenge with generating sufficient revenue.
“There is a lot of insensitivity around the level of our debt. I want to restate that our debt is not too high what we have is a revenue problem. Our debt is still very much within a reasonable fiscal limit. In fact, among our comparative countries, we are the least in terms of borrowing,” she had said.
It is hoped that the Federal Government will heed the advice of Professor Sheriffdeen Tella, a senior lecturer in the Department of Economics, Olabisi Onabanjo University, Ogun State who called on the National Assembly to stop the Federal government from further borrowing.
“It’s a very worrisome development and we should not encourage it at all. My candid view is that the National Assembly should stop the federal government from continuing to borrow. Because we have gone beyond the bounds, we should start thinking of how to begin to repay what we owe so that the debt burden and debt servicing will reduce ultimately from our budget,” he said.
Nigerians react
This rising debt profile of the country has continued to divide the country with some Nigerians picking a side to support.
According to Henry, the present administration will bankrupt Nigeria very soon if urgent steps are not taken.
“Nigerian Government budgeted N792m for Internet, Live TV On Presidential Jet, the Buhari administration will bankrupt Nigeria very soon if urgent measures are not taken as soon as possible. Nigeria’s debt rises toN25.7trn in one year, the masses are suffering while the politicians and political office holders are living large on a daily basis,” he complained
On his part, Andy Adewale believes if the borrowed funds are invested in infrastructure.
“There is no problem as long as the monies have been invested in infrastructural development projects this will be a good debt than will yield positive returns in the future. The richest country in the world, the United States of America has the largest sovereign debt of any nation. Even modest colonialist Britain has a £1.6tr debt,” he said.