Nigeria’s steady walk to full blown debt crisis

Nigeria’s debt challenge has for a long time been self-inflicted, especially with the level of borrowing in the last eight years. In this report; BENJAMIN UMUTEME examines the implications of the mounting debt.

Over the years, Nigeria has been groaning under the yoke of debt that continues to grow bigger with each passing year. Thus, the government was forced to borrow in order to meet up with its obligation to the citizenry as well as service such loans and existing loans.

This is as some analysts have said that Nigeria was gradually slipping into solvency especially with the level of borrowing taking into consideration that generated revenue had reduced considerably.

With oil theft and pipeline vandalism taking its toll on oil production, the mainstay of the country’s economy, the government has been forced into seeking funds from both local and foreign sources.

Rising global oil prices are not helping foreign exchange flow into the country amid widespread oil theft coupled with a broader decline in foreign direct investment, both trends putting pressure on the naira.

Among other dangers threatening the very foundation of the Nigerian state is the government’s increasing reliance on internal and external borrowing to finance its operations.

Various international organisations, private entities, senior government officials, and former government functionaries have decried the Buhari administration’s appetite for borrowing, and warned about the risk to the Nigerian State of allowing the situation to get out of hand.

The International Monetary Fund (IMF), projected that the Nigerian government may spend nearly 100 per cent of its revenue on debt servicing by 2026; while the World Bank warned that though Nigeria’s debt may seem sustainable, it is vulnerable and costly.

On its part, the Nigerian Economic Summit Group (NESG), also warned that the way the Buhari administration was going, it would create a debt burden for future governments. All this did not to assuage the administration’s penchant for borrowing.

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The NESG also said that “the growing deficit means that Nigeria would rely on borrowing to finance the 2022 budg…

Impending insolvency
Analysts at Afrinvest, stressed that the recent addition of securitised N23.7 trillion Ways and Means (W&M) owed the Central Bank and the devaluation of the naira may just have further worsened Nigeria’s debt situation and pushed the country towards insolvency.

According to them, the addition of the W&M debt to the FG’s component saw total debt burden rising to N48.3 trillion, an increase of 95.4 per cent on quarter-on-quarter.

“In terms of the proportional distribution of the debt liability between the FG and states plus the Federal Capital Territory (FCT), the FG’s share at the end of the second quarter stood at 89.5 per cent, representing an increase of 540 basis points (bps) from 2022 year end.

“Also, we observed a significant negative pass-through effect of the naira devaluation in the second quarter due to the shift in foreign exchange (forex) amid weak buffering FG’s external debt component.
“Precisely, while the FG’s external debt only rose by 4.2 per cent in dollar term to $38.8 billion from $37.2 billion in 2022, the naira equivalent jumped by 79 per cent to N29.9 trillion – a development that indicates that Nigeria may be at risk of debt overhang should naira depreciation continue and/or external debt profile rise further.

“Assessing the implications of the new changes to Nigeria’s debt profile from the prism of local and internationally set sustainability metrics, we averred that Nigeria is on the cusp of insolvency evidenced by the unimpressive readings of debt-to-GDP, debt service-to-revenue and fiscal deficit as percentage of GDP in the first half of 2023.
“Sadly, key macroeconomic health pointers – inflation (25.8 per cent) and exchange rate (official rate: N747.76/$, parallel market rate: N995/$), crude oil output (1.18mbpd), FX reserves ($33.2 billion) and foreign capital inflows ($1.1 billion), are all at their lowest ebbs in a decade.

“These underscore some of the herculean tasks inherited by the new administration from the Buhari-led government between 2015 and May 2023,” said Afrinvest analysts.

The Debt Management Office (DMO) had disclosed that Nigeria’s total public debt stood at N87.38tn at the end of the second quarter of 2023.

The figure represents an increase of 75.29 per cent or N37.53 trillion compared to N49.85 trillion recorded at the end of March 2023.

“Nigeria’s total public debt stock as at June 30, 2023, was N87.38tn ($113.42bn). It comprises the total domestic and external debts of the Federal Government of Nigeria, the thirty-six states, and the FCT.

“The major addition to the Public Debt Stock was the inclusion of the N22.712tn securitised FGN’s Ways and Means Advances,” the debt management agency said.

Halting walk to bankruptcy

For Financial Analysts, Gabriel Idakolo, the policies of President Bola Tinubu in the past three months helped to stop Nigeria’s drift towards insolvency.

According to the financial expert in a chat with Blueprint Weekend, the new administration met a debt crisis.

He said, “The new administration of President Bola Tinubu met a debt crisis when he was sworn in on May 29, 2023.

“The immediate policy direction of the government helped in no small measure to halt Nigeria’s ascension to bankruptcy. The debt servicing has almost taken 100 per cent of the nation’s revenue in May, 2023.

“The federal government resorted to increased borrowing to stabilise the system although additional borrowings at this time is dangerous for our economic survival.”

Similarly, a Political Economist, Adefolarin Olamilkan, noted that the past administration led by President Muhammadu Buhari did not take advantage of the numerous loans it borrowed. According to him, lack of proper planning on how to utilise the huge amount borrowed is what has put the country in the near debt crisis situation it now finds itself in.

He told this newspaper that the loans were supposed to help us translate our economy in a way that paying them would constitute a spiral in the wheel of the economy.

“Here we are, the fear of the huge amount of this debt figure, is scary and there is a projection that it would eventually become a full-blown debt crisis that would ground the entire architect of our revenue sources.

“In other words what this means is that, first we never plan properly on how best the loan and borrowings would translate into a source of which every item procured or obtained with the loans can be self-funding in order to repay the loans.

“Secondly, we borrowed and acquired this debt as a result of having no economic driven project tied to the loans, in the sense that we pile up this debt through frivolous political action to satisfy the government in power.

“Thirdly, this debt is going to be a burden on the economy because there is no genuine empirical economic solution to the greater use of borrowings beyond deploying our borrowing to cater for government excess expenditure on non-capital projects and programmes.

Arresting drift towards crisis

To arrest the drift towards a debt crisis, the IMF said Nigeria must reduce its fiscal deficit by 3 per cent.

In the 2023 budget, the overall deficit is N11.34 trillion representing 5.03 per cent of GDP which is to be financed mainly by borrowings made up of domestic sources of N7.04 trillion, and foreign sources of N1.76 trillion.

While debt service cost of about N6 trillion represents about 31 per cent of the budget.

This underscores the need for urgent action to address revenue underperformance and expenditure efficiency.

In its report ‘How to Avoid a Debt Crisis in Sub-Saharan Africa’, the Fund said Nigeria and Sub-Saharan countries should re-anchoring fiscal policy through a credible medium-term strategy and prepare by undertaking fiscal adjustment to bring debt back to a safer level.

“In most sub-Saharan African countries, fiscal policy focuses excessively on short-term goals and is not guided by a clear medium-term strategy. This lack of anchoring has resulted in frequent breaches of fiscal rules and ever-increasing public debt levels.

“A more strategic approach to fiscal policy would be preferable by setting explicit debt targets that integrate key policy trade-offs between debt sustainability and development objectives, rather than focusing narrowly on short-term fiscal deficits.

“The paper suggests a novel approach to estimating country-specific medium-term debt anchors, which ensures that debt service costs remain manageable.

“The region’s ratio of interest payments to revenue, a key metric to assess debt servicing capacity and predict the risk of a fiscal crisis, has more than doubled since the early 2010s and is now close to four times the ratio in advanced economies,” the IMF said.

Tax waiver options

The Bretton Woods Institute also advised the federal government to prioritise the removal of tax exemptions and enhance domestic revenue generation to mitigate their fiscal deficits.

According to the institute, the strategy could help safeguard economic growth.

“Sub-Saharan African countries tend to rely excessively on expenditure cuts to reduce their fiscal deficits. Although this may be warranted in some circumstances, revenue measures, like eliminating tax exemptions or digitalising filing and payment systems, should play a greater role.

“Mobilising domestic revenue is less detrimental to growth in countries where initial tax levels are low, whereas the cost associated with reducing expenditures is particularly high given Africa’s large development needs.”

Restructuring existing loans

It has been proffered that the federal government can avoid a debt crisis by restructuring existing loans with a view to engage more in partnership with private sector and multilateral development agencies in infrastructural funding.

The federal government has also been advised to be more prudent with recovery of looted funds, tackle corruption and improve our economic position by strategic investment in oil and gas, energy, agriculture and manufacturing and SMEs to boost the economy and increase revenue.

Pause borrowing

Olamilkan noted that to solve the country’s looming debt crisis, fiscal authorities must have an understanding of why they borrowed.

The economist stressed the need for the present administration to stop borrowing in the meantime.

“At this point the current administration of President Tinubu must make good his statement of looking inward to raise funds for critical government projects.

“Similarly, the state government must stay away from further internal and external loans procurement. This may be difficult, but it’s a hard-line position they need to go through for now.

“Again, the national various streams of revenue generation must be adequately secured. In the sense that the government must show transparency and accountability in what is remitted into the national pursuit. The problems of linkage and corrupt activities around tax collection must end.

“Additionally, there is a need for the government to have a review over the various projects that loans were procured for, particularly those with long term goals that have been abandoned or overtaken by political and economic factors because public funds are deducted to service the loans procured for these abandoned projects scattered across the country. Painfully servicing such loans has now become a drain of public revenue.

“In addition, it is the right time for the Nigerian state to rethink her policy of economics in regards to loan and revenue base. Many times, people in government are tempted and lured into believing in the borrowing schemes of international bodies like World Bank, IMF and others, as sure ways to quickly fix some domestic macroeconomic and fiscal imbalances,” he said.

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