Time for FG to cut down on borrowings

For every country, borrowing is inevitable. In the case of Nigeria, there is a need for the federal government to borrow as it seeks to bridge the country’s huge infrastructure gap. However, analysts have opined that the government should look for alternative sources of funding instead of continually borrowing; BENJAMIN UMUTEME writes.

Debt in developing economies has built up fast over the past decade, far outpacing revenue development, and has been followed by a slowing of economic growth. The pandemic therefore hit when many countries were already highly vulnerable, and 2020 saw a record in sovereign credit rating downgrades and defaults.

Uncertainties about economic recovery and the state of financial markets coupled with high debt vulnerability have led to a widespread belief that the developing world could be on the verge of a major debt crisis. Calls for debt restructurings as well as other faster relief efforts have followed, to help countries cope with the immediate health crisis and avoid jeopardising their economic recovery.

In spite of all these, countries globally will continue to borrow to help address their development needs. For Nigeria, the country’s debt keeps rising due to the country often having to resort to borrowing to tackle its infrastructure needs.

During the administration of President Muhammadu Buhari, the country often patronised various multilateral agencies to fund to fix its dilapidating infrastructure. According to analysts, it was the reason under the last administration, Nigeria’s borrowing rose astronomically.

The implication is that debt-servicing has become a huge burden that is slowing down the government from carrying out its obligations to the citizenry.

The World Bank warned that high borrowing costs were making it difficult for developing economies to boost growth. The warning by the multilateral lender comes as international bond sales from governments of emerging economies hit an all-time high of $47 billion in January.

This is just as data by the Institute of International Finance revealed that global debt levels touched a new record of $313 trillion in 2023 while the debt-to-GDP ratio – a reading indicating a country’s ability to pay back debts – across emerging economies also scaled fresh peaks, indicating more potential strains ahead.

UNDP report

And this is the thrust of a new report by the United Nations Development Programme (UNDP).  The UN agency in the report it released earlier this week stated that the debt and development crisis faced by many developing countries continues to worsen.

According to the UNDP, increase in public resources and export revenues that must be channeled towards public and publicly guaranteed debt service (to cover both the principal and interest payments) is a key dimension of the current crisis.

The report entitled: Sovereign Debt Vulnerabilities in Developing Economies, states that developing countries’ governments paid almost $50 billion more to their external creditors (bilateral, multilateral and private) than they received in fresh disbursements.

A breakdown of the data showed that private creditors account for most of the change in the direction of net transfers.

It said that between 2021 and 2022, debt service to these creditors had remained stable (at about $260 billion), disbursements declined by 45 per cent, from over $300 billion to less than $170 billion.

“This waning of private creditors’ appetite for developing countries’ public debt resulted in the lowest disbursement levels since 2011.

“As a result, during this period, net transfers on public and publicly guaranteed debt from private creditors switched from an inflow of more than $40 billion to an outflow of almost $90 billion.

“The year 2022 also marks the first occurrence of a net negative resource transfer for all developing countries as a group since 2008. It also reflects a record high number of 52 individual countries in this situation, with the median net transfer amounting to about 4 per cent of government revenues for this subset of countries.

“The increase in both the magnitude and prevalence of net negative resource transfers at a time of compound crises reveals the limitations of the current framework of international debt architecture for supporting development.

“The surge in net negative transfers is tied to a significant decrease in access to fresh financing for numerous countries. This decline stems from various factors, including higher interest rates in developed countries, deteriorating global financial conditions and mounting concerns about debt distress in developing countries.

“This dynamic is reflected in the lowest levels of external sovereign bond issuance during 2022 and 2023 in the last 10 years, plummeting to one third of the peak reached in 2020.

“Since early 2024, sovereign bond sales for some developing countries have resumed, buoyed by a thaw in financial markets and on the expectation of interest rate cuts in major developed economies. In aggregate, bond issuance by developing countries in the first quarter of 2024 soared to $45.5 billion, a record high for this period of the year. Among these, five countries rated investment grade issued for $28.5 billion. Issuances by eight non-investment grade countries amounted to $17 billion. Notably, this latter group includes three sub-Saharan countries – Benin, Côte d’Ivoire and Kenya – a region that had been shut off from bond markets for most of 2022 and 2023,” the UN Agency said in the report.

Debt hampering growth

In the same vein, the president of African Development Bank (AfDB), Dr. Akinwumi Adesina, asserted that developing economies’ immense economic potential was being undermined by non-transparent resource-backed loans that complicate debt resolution and compromise countries’ future growth.

Speaking at the International Monetary Fund and World Bank2024 Spring Meetings, in Washington, Adesina highlighted the challenges posed by Africa’s ballooning external debt, which reached $824 billion in 2021, with countries dedicating 65 per cent of their GDP to servicing these obligations.

He said the continent would pay $74 billion in debt service payments this year alone, a sharp increase from $17 billion in 2010.

“I think it’s time for us to have debt transparency accountability and make sure that this whole thing of these opaque natural resource-backed loans actually ends, because it complicates the debt issue and the debt resolution issue,”

‘Proclivity for borrowing’

Analysts still think that the debt vulnerabilities of emerging economies will continue to impact on their development as many of them lack the funds.    

In a chat with Blueprint Weekend, economist Adefolarin Olamilekan attributed the failing development obligations by emerging economies to their proclivity for borrowing. He noted that most times, such borrowed funds have no bearing on development.

According to him, Nigeria’s case is very pathetic as an emerging economy suffering from debt obligations deepening her underdevelopment situation. And the UNDP report has only confirmed the obvious threat emerging economies like Nigeria face.

He said: “Sadly, some of the loans collected either on a short and long term basis to drive development project infrastructure or correct fiscal imbalance in their economy further deepened the underdevelopment of the emerging economies.

“Not only that the majority of the borrowing comes with its conditional requirements many of the emerging economies applied that worsen the domestic economic situation instead of improving it. For instance, funds borrowed to tackle poverty amongst emerging economies have not really addressed poverty; rather it has become a conduit pipe for corruption through cosmetic poverty alleviation projects and programmes.

“Similarly, is money borrowed to tackle food and agriculture problems in emerging economies? Such projects largely are meant to waste public funds due to the polarisation of such initiatives. Many times, it is claimed that such funds are meant to provide seedlings, fertilizer, inputs for farmers for free or subsidies price rate. At last it turns out not to be the reality.

“In another breath borrowing was taking place amongst these emerging economies to tackle fiscal imbalance, especially to support their domestic trade deficit and monetary challenges. However, such borrowing never addresses such problems; rather funds are wasted and their debt profile keeps increasing.”

Ending the debt trap

For Nigeria to escape the debt trap, the federal government must take deliberate action to mobilise domestic resources.

The Minister of Finance and Coordinating Minister of the Economy, Wale Edun did tell journalists that the federal government was looking at mobilising domestic resources as it looks to slow down on borrowing.

Adefolarin insisted that escaping the borrowing trap required deliberate action by emerging economies at individual and collective level; they have all been conscientised to believe that till they borrowed domestic resources mobilisation is not enough.

“So, we believe they must begin to rethink how far they can rely on domestic resources mobilisation with priority development projects.

“Emerging economies’ respective governments must take action to broaden the scope of governance beyond just regulators to active participants in business enterprises.

“Consequently, there is a need to reinvent the fiscal policy of respective emerging economies to drive domestic financial resources mobilisation through tax and tariff link to public service accountability.

“Another is cutting wastage and inefficient use of public funds across board in their respective development initiatives,” he said.