Nigeria and realities of growing debt burden

Last week was a scary one for millions of Nigerians who have been impoverished by the government’s rising appetite for easy money, including debt, and missteps of statecraft. Scary, not because the government has secured a fresh loan or about to so, but that its officials reminded the people of their aloofness to the real cost of the rising indebtedness and its correlation with other socio-economic variables.x

First, in a self-contradictory intervention at the African Development Bank (AfDB) 2021 yearly meetings, the Minister of Finance, Budget and National Planning, Zainab Ahmed, said the debt level was “very healthy and sustainable” but admitted that “we are struggling with revenues, which is what we need to pay our debts.”

“We are cutting costs; we are improving the ease of doing business and trying to leverage private sector resource capacity to invest in infrastructure to reduce government spending. We are working on increased transparency in public financial management; we are enforcing fiscal discipline to expand our fiscal space so that we can continue to service our debt and borrow more to build our infrastructure capacity,” she said.

In a rare disclosure also, the minister said the debts of some states were not included in the current figures, which the Debt Management Office (DMO) had estimated at N33.26 trillion as of March 31, 202, rising marginally from N32.93 trillion booked at the end of last year. Beyond the revelation by the minister, the Ways and Means (W&M) advance estimated at N10 trillion and the adoption of the Nigerian Autonomous Foreign Exchange (NAFEX) window for official businesses (which moved up the FX rate from N379/$ to about N411/$) have shown that the national debt is much higher than what has been disclosed. The disputed debt to GDP ratio will also be higher than even the 35 per cent upper limit when the debt is re-profiled.

In pairwise, Nigeria’s debt to GDP is moderate at its current rate and far less than the stipulated 58 per cent benchmark. South Africa’s debt to GDP currently stands at 77 per cent while the recent falling oil prices have moved up that of Algeria and Angola from 46 to 53 per cent and from 107 to 127 per cent respectively. Egypt, another regional economic power, has also seen its debt to GDP ratio moved from 84 to 90 per cent and Morocco, from Morocco 65 to 76 per cent, according to Okonjo-Iweala’s presentation at the AfDB event.

Ghana’s debt to GDP has crossed the dreaded 70 per cent to 72 per cent with a projection that it will hit 86 per cent by 2024. The debt to GDP of Kenya, which is currently battling to reduce foreign investors’ holding in its debt portfolio, climbed to 35.6 per cent and is expected to reach 38.5 per cent at the end of the year. In Europe and elsewhere, debts to GDPs are in the neighborhood of 100 per cent. India ended the 2020/2021 financial year at 58.7 per cent while loan-shine Germany increased its debt stock by EUR 273 billion amidst COVID-19 distortion, bringing the total figure to EUR 2.2 trillion (or an equivalent of 70 per cent of GDP) at the end last year.

Even China, whose total credit to the rest of the world, the Institute of International Finance (IIF) estimated at $5.6 trillion as of mid-2020, is not free from the weight of debt. A report by the National Institution for Finance and Development (NFID), a Chinese government-linked think tank, puts the nation’s overall debt at 270.1 per cent GDP at the end of 2020, up from 246.5 per cent at the end of 2019. The report, however, does not differentiate between state borrowings, which are mainly off-the-balance sheets and lacking in transparency, from debt holdings by households as well as private businesses. Another report said China’s outstanding foreign debts reached $2.4 trillion at the end of 2020.

Overall, national debts have increased tremendously in recent years with Dr. Bongo Adi, an economist at the Lagos Business School, stressing that the fact that the global bond market is over 50 per cent larger than the output of the world economy has underscored the importance of debt to modern economies.x

As of August 2020, the overall size of the global bond market was approximately $128.3 trillion, according to the International Capital Market Association (ICMA) just as other researchers put last year’s GDP at $84.5 trillion. This brings the global average of bond market size to GDP ratio to 152 per cent.

Meanwhile, the total global debt stock surpassed IIF’s earlier $277 trillion projection to hit an all-time high of $281 trillion or 233 per cent, the size of the value of goods and services produced worldwide as of last year. It thus means that Nigeria’s debt to GDP, indeed, is moderate.

But does this justify more borrowings as suggested by the Finance Minister and the Senate President, Ahmad Lawan? The Senate President had last week, said Nigeria, being a poor country, had no option to borrow to fund its programmes – a statement that apparently foreclosed any hope of restraint in what has become a culture in the management of the national economy.

Successive administrations have bandied low debt to GDP as a license to borrow more. Interestingly, the government falls back to revenue, not GDP, to service or amortise debt instruments. In Q1, agriculture contributed over 21 per cent to the country’s nominal GDP. The figure, which reflected a historical trend, has also retreated recently. It was as high as 40 per cent before telecoms and a few new sectors came to the economic mainstream. Other key drivers of the GDP are manufacturing and telecommunications.

Sadly, the mainstay of the country’s revenue is not agriculture nor manufacturing but oil, which contributes less than 10 per cent of the national output. In the same logic, agricultural activities are majorly tax-excepted, implying that the sector is not a cash cow. This suggests that sectors that drive GDP, which historically informs government’s borrowing, do not provide the liquidity needed to service debt.

Hence, Adi at a forum on debt and economic recovery last week, said revenue consideration is a major factor, much more relevant than GDP, when analysing debt sustainability.

Last year, the government spent N2.43 trillion, which was 71 per cent of the amount available for budget funding, on debt servicing. This was contained in the budget implementation report released by the Ministry of Finance, Budget and National Planning a few weeks ago. The overall figure was a modest deceleration from 99 per cent recorded in Q1 2020 when the government earned N950.56 billion and received N943.12 billion debt-servicing bills.

While debt servicing is rising and increasingly sapping the entire retained revenues of the government, incomes are falling. For instance, a total of N3.42 trillion, N1.4 trillion (41.2 per cent) oil revenue and N2 trillion (58.8 per cent) non-oil revenue, was received to fund last year’s budget. The amount received was N1.9 billion or 36 per cent short of the amount contained in the 2020 amended annual revenue estimate and N701.8 billion (17 per cent) less than the N4.1 trillion recorded in 2019.

Adding to this complication is the fiscal deficit which is rising at an alarming magnitude. The Federal Government recorded an all-time high fiscal deficit of N6.6 trillion last year – an equivalent of 14.2 per cent of the 2020 GDP. The amount was also N2 trillion, that is 43.2 per cent, higher than the projected N4.6 higher and 57 per cent above the 2019 deficit. The shortfall was partly-financed through domestic borrowing to the tune of N2 trillion.

“The total public debt stock as of 31st December 2020 stood at US$86,392.54 million (N32,915.51 billion) indicating an increase of US$2,339.22 million (N5,514.13 billion or 20.12 percent) when compared to the N27,401.38 billion (US$84,053.32 million) recorded at the end of December 2019. The breakdown comprised of US$33,348.08 million (N12, 705.62 billion or 38.6 per cent) for external debt while the balance of US$53,044.46 million (N20, 209.89 billion or 61.4 per cent) was for domestic debt stock. This translates to a net present value of total public debt to GDP ratio of 23.6 per cent as of the end of December 2020.

This is below the country specific threshold of 25 per cent and the international threshold of 56 per cent,” the document assured.

On a per capita basis, the declared debt translates to N166, 300 per Nigerian. Hence, a senior fellow at the Global Governance Institute, Brussels, Belgium, and ex-Nigerian diplomat, Ejeviome Otobo, said Nigeria needed a major reform to up its taxes from its current seven per cent to GDP to catch up with the rest of African countries who he said that were in the region of 18 per cent.

The World Bank and the International Monetary Fund (IMF) have severally described the country’s tax as paltry considering its economic potential. These advisories have underscored historical overreliance on unstable oil incomes, and the tendency towards borrowing when there are shocks. In a policy document on Nigeria recently, the IMF said major tax reform was critical and inevitable as the country looks forward to a resilient recovery.

Per capita wise, the current officially declared debt translates to N166, 300 Nigerian or $437.6, using the subsisting exchange as of when the computation of the debts was done. This is the nominal amount the government has incurred per Nigerian.

But as Okonjo-Iweala said last week, the real cost of Nigeria’s rising public debt is the inability of the country, like other African countries, to fund projects that could positively affect the socio-economic life of an average citizen.

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