Much Ado About Nothing? Reviewing Nigeria’s Debt Situation

Nigeria’s debt situation has been wrongly emphasized as distressed when it is not yet an extreme cause for concern.

For some time now, economists have been debating the sustainability of Nigeria’s debt. Between 2015 and the first quarter of 2021, Nigeria’s total debt increased by 230 per cent from N12.6 trillion to N41.6 trillion. This debt collectively reflects the domestic and external borrowings of the Nigerian government, our 36 states and Abuja. According to the IMF’s 2022 macro stress test, by 2026, Nigeria might spend 100 per cent of its revenue on servicing debt. To critics such as Dr Azubuike Nkala of the Orient Daily, the government’s continued borrowing is irresponsible and Nigeria needs alternative solutions other than debt for funding its economic plans.

Nigeria’s policymakers, however, have been defending their borrowing practices and explaining their necessity. At the public presentation and breakdown of the 2022 appropriation bill in October 2021, the Minister of Finance, Budget and National Planning, Zainab Ahmed, stated that borrowings were instrumental to Nigeria’s exit from recession. Considering the considerable growth in Nigeria’s debt over the past six years, the question of whether our debt situation is sustainable is more than justified.

Thinking about Nigeria’s debt, there are at least three things to consider, which this piece will touch on. First, Nigeria’s growing debt is the result of a revenue problem. Second, the proceeds from debt have mostly been put to good use and, as long as plans to improve revenue and curtail expenditures are followed through, Nigeria is well placed to meet its repayment obligations. Already, the government has increased its focus on improving non-oil revenues and strengthening fiscal management. As such, the third aspect is that Nigeria’s debt situation has been wrongly emphasized as distressed when it is not yet an extreme cause for concern.

The Task That Must Be Done

To better understand the origins of Nigeria’s debt situation, let us begin by looking at Nigeria’s federal budget. Our budget reflects the country’s projected revenues and expenditures. If revenues are higher than expenditure, the budget is in surplus and if expenditures are higher than revenues, the budget is in deficit. Revenue depends on a number of assumptions, including those about oil prices, oil production levels, the exchange rate, inflation, and contributions from state-owned enterprises. Revenues also determine the level of funds available to finance expenditures. These projected inflows are often classified as oil and non-oil revenues.

Expenditures are typically split into recurrent (all payments for goods and services other than for capital assets) and capital (payments for investments and acquisition of assets). The budget also usually includes key provisions for debt service (repayment of previous loans) and the sinking fund (a provision for future loan repayments).

In 2016, Nigeria’s budget had a deficit of N2.22 trillion while the amount earmarked for servicing our debts was N1.36 trillion. Even then, there were comments that Nigeria needed to adopt austerity measures and not resort to unrestrained borrowing. The approved 2022 budget shows that the deficit has tripled to N6.38 trillion and that N3.80 trillion will now be spent on servicing existing debt. This growth in debt is not as worrisome as it may seem when we consider some of the macroeconomic challenges that Nigeria has faced in recent years.

The Nigerian economy has experienced at least two major shocks since 2016: firstly, Nigeria entered a recession as a result of a crash in oil prices and disruptions to oil production that seriously decreased oil revenue. Revenues fell again in 2020 when the COVID-19 pandemic negatively disrupted oil price benchmarks, global oil production as well as productivity in other sectors of the global economy. Given that oil remains Nigeria’s primary source of revenue, these two critical periods reduced Nigerian revenues, drove up the fiscal deficit and required significant borrowing.

It is worth highlighting that there are positive sides to borrowing when debt is effectively utilized. Despite the explanations of inadequate revenues to fund the budget and thus a need for increased debt, can we say that the proceeds have been put to good use? We can because one of the main uses of these borrowings has been infrastructure development, which is important when trying to build a competitive economy. Nigeria needs to increase spending on infrastructure to over N30 trillion every year over the next few decades to help close the infrastructure gap. For context, Nigeria is expected to spend N1.42 trillion on infrastructure in 2022.  In a 2020 article, the McKinsey Global Institute stated that, ‘infrastructure has a socioeconomic rate of return of about 20%’. This essentially means that the investments made in roads, rail, power, and aviation could return 20 kobo in the long run, for every naira spent.

Presently, over N360 billion in SUKUK bonds have been used on some road projects including the dualization of Abuja-Abaji-Lokoja road, and the rehabilitation of the Enugu-Port Harcourt dual carriageway. External borrowing has financed the double-track standard gauge Lagos-Ibadan rail. The Zungeru Hydropower Plant and the National Electrification Project are also key to increasing the infrastructural stock, which is currently around 25 per cent of Nigeria’s GDP. Infrastructure investments have a lag time so the benefits will be reflective in due course.

Debt challenges have become a priority in global economic discourse because the COVID-19 pandemic has exposed the lack of fiscal wiggle-room in many world markets and has increased structural vulnerabilities in certain countries. Sri Lanka and Zambia are two countries that have defaulted on their existing obligations in the last two years as a direct result of the pandemic’s impact. The consensus amongst leaders of the global economies is that emerging economies are teetering on the brink of a debt crisis if they are unable to return to an even keel. This is why it is important to ask how much debt is too much.

In Nigeria’s case, we can just focus on two key metrics: the debt-to-GDP ratio and debt service-to-revenue ratio. When compared with other countries, Nigeria’s debt-to-GDP ratio is not alarming. Currently, Nigeria’s public debt-to-GDP ratio is around 23 per cent, which is lower than the 55 per cent advised by the International Monetary Fund and the World Bank for countries in Nigeria’s peer group. For context, South Africa has a debt-to-GDP ratio of about 69 per cent, and Ghana’s is 78 per cent.

Public concerns are most audible when it comes to Nigeria’s debt service-to-revenue ratio, which has risen beyond 70 per cent since the onset of the pandemic (it is currently 76 per cent while South Africa’s is around 20 per cent). Nigeria’s debt service-to-revenue ratio growth is clearly linked to the decline in revenue Nigeria faced due to the economic challenges of 2016 and 2020.

The Excessive Debt Burdens of COVID-19

Public concerns have been centred on the risks associated with growing debt and an inability to finance (future) debt obligations. Some of the risks are around market financing, interest rates, and currency risks, which affect existing debt and inhibit the ability to get new stock. In May 2022, JP Morgan removed Nigeria from its Emerging Market Sovereigns recommendation as a result of their analysts’ perception of fiscal woes. Their analysts’ underlying assumption is that Nigeria has failed to capitalize on the current high oil prices to reduce fiscal constraints. This recommendation essentially measures market-financing risk for investors.

In 2020, Nigeria launched the Strategic Growth Revenue Initiatives or ‘SRGIs’ aimed at exploiting burgeoning sectors of the economy and diversifying the revenue base. Thus one could argue that JP Morgan’s position, however, objective is limited, as it only considers growth in oil revenue in this period of high oil prices without considering non-oil revenues. Effective implementation of the SRGIs should significantly improve Nigeria’s overall revenue beyond oil revenues.

Debt sustainability is typically understood as the growth and management of debt at rates that will allow meeting up with repayments and avoiding defaults. The key to assuaging fears about the debt service-to-revenue ratio is to highlight strategies towards improving earnings and curbing unnecessary expenditure. Through steps such as introducing a tax on the incomes of oil companies, and improving regulation, the successful implementation of the Petroleum Industry Act will help to address the deficiencies in the oil industry. Combined with the Host Community Development Trust Fund, which will help quell some of the agitations within oil-producing communities the Petroleum Industry Act could go a long way in safeguarding oil revenues.

Moreover, the federal government has been creative in cutting its expenditure by reducing leakages and monitoring its wage bill, which will go a long way in addressing budget challenges. The introduction of the Treasury Single Account (improves appropriation control), Integrated Payroll and Personnel Information System (payroll management), and the existing Government Integrated Financial Management System (financial resource management), are part of the overall financial management strategy.

Sub-national governments have also been encouraged to strengthen fiscal management. Through initiatives such as the World Bank-supported States’ Fiscal Transparency Accountability Program, and the African Development Bank Middle Income Country Technical Assistance Fund Grant, Nigeria’s states are also contributing toward achieving debt sustainability. These concerted efforts should address Nigeria’s debt directly by improving the available revenues for capital expenditure, thereby mitigating Nigeria’s revenue challenges.

Worries about the impact of currency or exchange rate risk have come to the fore given that Nigeria’s external debt currently stands at $39.9 billion. The external debt includes debt to multilateral institutions and bilateral institutions, as well as commercial and promissory notes. The central bank’s naira-dollar devaluations over the past few years and Nigeria’s multiple exchange rates windows have given investors and experts’ reasons to be apprehensive. These issues can easily lead to the ballooning of existing external debt without even seeking new loans.

However, eleven per cent of Nigeria’s $39.9 billion external debt is bilateral debt such as those owed to China-Exim Bank. This is worth noting because such debt repayments tend to be in different currencies and not just the dollar, which helps to reduce the risks attached to currency concentration. In addition, multilateral institutions such as the World Bank and the IMF make up 48.6 per cent of Nigeria’s external debt. These have favourable tenor lengths and fixed interest rates, which help minimize the conditions that fast-track a default. Multilateral institutions may also be more favourable and amenable to debt forgiveness than bilateral creditors.

Another concern pertains to the risks associated with movements in the interest rate. Until May 2022, the CBN’s Monetary Policy Committee or ‘MPC’ had kept the headline monetary policy rate constant at 11.5 per cent because increasing the rate to combat inflation would be at the expense of growth, which is more of its priority. The MPC approved a 150-basis-point rate increase to 13 per cent. The MPR rate had not changed for about 30 months showing the CBN’s preference for maintaining as low an interest rate environment as possible. A lower domestic interest rate environment should encourage local borrowing and may lead to favourable re-pricing of existing debt. On the other hand, in a high interest rate environment, domestic debt can be expensive which may explain the reasoning behind policymakers’ decisions to optimize the external-domestic debt mix.

In 2013, domestic borrowing accounted for 86 per cent of total debt but is now down to about 60 per cent to reduce the stock of expensive domestic borrowing. The domestic interest rate is not the only priority; foreign interest rates also impact the debt stock. The United States and some other leading economies have raised their benchmark rates in recent months as a response to rising inflation levels. The US, for instance, has raised its benchmark rate multiple times and is currently at 1.75 per cent. All of this means that new external borrowings may be more expensive. This could lead to capital flight as investors will be keen on getting higher returns in less risky currency.

Naira Struggles

The importance of this conversation around growing debt cannot be overstated as the debt is crippling several emerging market economies. The number of solutions that the international community is proffering buttresses this. The Debt Service Suspension Initiative was developed by the G-20 in 2020 to encourage the freezing of debt payments for some developing countries, presumably to avoid defaults and provide fiscal buffers. The Common Framework for Debt Treatments was also established by the G-20 in 2020 to help restructure existing debts.

Nigeria has not attempted to participate in either of these initiatives because the debt situation is not as precarious as the media has expounded. Moreover, these solutions can end up downgrading Nigeria’s sovereign credit ratings leading to more expensive future borrowing. Nigeria’s reluctance to participate in these initiatives does not in any way indemnify the government but shows that the real pursuit for policymakers is long-lasting solutions instead of quick reactions.

Nigeria’s fiscal authorities understand that the country’s debt stock should not continue to grow at the rate we have seen in the last few years. Criticism towards Nigeria’s current debt situation is welcome but our debt situation should, equally, not be erroneously explained to be debilitating just yet. Nonetheless, if properly implemented, Nigeria’s targeted strategies to cut expenditures and improve oil and non-oil revenues will lead to growth and improved debt sustainability. The most recent DSA has emphasized that Nigeria’s debt remains sustainable in the medium to long term. So for now, alarmist concerns might just be much ado about nothing

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