"Borrow Pose": Nigeria's Debt Situation and Its Path to Economic Resilience
Nigeria is Africa's largest economy and most populous country. It is also one of the most indebted countries in the world. In recent years, the country has faced a significant challenge in managing its debt situation. Nigeria's debt has grown over the years, driven by both external and domestic factors. External factors include fluctuations in global oil prices, which have a direct impact on its revenue generation due to its heavy reliance on oil exports. Domestic factors include fiscal deficits, inefficient public spending, and inadequate revenue diversification. According to figures from the Nigeria Debt Management Office (DMO), Nigeria's public debt stock stood at N87.36 trillion ($113.4 billion) as of June 30, 2023. This represents about 33% of the country's gross domestic product (GDP). While this debt-to-GDP ratio is relatively low compared to some other countries, it is still a significant burden for Nigeria, given its low level of income. In this article, we will discuss the nature of Nigeria's debt burden, its impact on the country, and what can be done to address it.
Understanding Nigerian Borrowing
Let us simplify government borrowing. Typically, when a government plans to build roads, schools, and hospitals it will require funding. If the revenue it generates is insufficient to fund the desired project, it will have to borrow. Actually, even if the revenue is sufficient, the government may still borrow for fiscal management purposes. This is how debt often operates for a nation. Nigeria, like many countries, borrows money to finance crucial projects and investments. However, in recent times when the scale tips towards borrowing more than the country can comfortably repay, a debt burden emerges.
Nigeria's government borrows money from a variety of sources, including:
- Domestic sources: The government borrows money from domestic investors by issuing government bonds and treasury bills. In simple terms, the government collects our money as "deposits" and issues a promise to pay back with certain conditions. In recent times, the government has utilized the Central Bank as a source of borrowing. This was coined as "Ways and Means" Advances, essentially a form of quantitative easing that involved printing more Naira, lending to the government and later securitizing it as a form of government bond.
- External sources: The government borrows money from foreign governments and multilateral institutions such as the World Bank and the International Monetary Fund. It also offers dollar-denominated government bonds known as Eurobonds.
What is causing Nigeria's debt burden?
Another factor that has contributed to Nigeria's debt burden is corruption. Corruption has led to the misallocation of resources and the waste of public funds. This has made it more difficult for the government to generate revenue and to invest in critical areas such as infrastructure and education.
Finally, Nigeria's debt burden has also been caused by the country's weak economic growth. Nigeria's economy has grown slowly in recent years, which has made it difficult for the government to generate revenue and to service the country's debt. Nigeria's government revenue has been declining in recent years due to a number of factors, including the fall in oil prices, the COVID-19 pandemic, global supply shocks due to the Russia-Ukraine crisis and crushing government policies that have stifled private sector participation in the economy. Decimating the micro, small, medium enterprise (MSME) sector has played a large part in slowing economic growth in the country.
Impact on the Nigerian Economy
You may wonder, how does Nigeria's debt burden affect you and your loved ones? The answer lies in the ripple effect it has on various aspects of our lives:
- Crowding Out Private Investment: One of the significant concerns arising from high levels of debt is the potential crowding out of private investment. Government borrowing can crowd out private investment by raising interest rates and making it more expensive for businesses to borrow money. This makes it more difficult for investments in critical sectors such as education, healthcare, and infrastructure. This can hinder long-term economic development and innovation.
- Exchange Rate Vulnerability: With a substantial portion of Nigeria's debt denominated in foreign currencies, fluctuations in exchange rates can magnify the debt burden. A depreciating local currency can lead to an increase in the value of external debt, making repayment more challenging and potentially resulting in capital flight. The recent official devaluation of the Naira from N430/$1 to N770/$1, coupled with increased interest rates in international markets, has seen the country's debt profile almost double in Naira terms. This means the government has to use more Naira to pay for foreign debts thereby reducing the availability of funds for domestic investments and welfare spending.
- Creditworthiness and Investor Confidence: Excessive debt levels can erode investor confidence and lower Nigeria's creditworthiness in the global financial markets. This, in turn, can lead to higher borrowing costs, limiting the government's ability to secure favorable terms for future loans. Earlier this year, Moody's, a global sovereign ratings agency downgraded Nigeria's credit rating, citing reduced confidence in the government's fiscal and debt position. This was a similar action taken by Fitch and Standards and Poor, all global sovereign ratings agencies. Most recently, the FTSE Russell, a subsidiary of London Stock Exchange Group (LSEG), demoted Nigeria from Frontier to Unclassified Market Status. The effects of all those have meant a significant drop in foreign investment into Nigeria. Reduced foreign investment means fewer jobs and lower economic activities.
- Macroeconomic Instability: In 2022, Nigeria spent N6.1 trillion (USD$16.2 billion) on debt servicing, which is more than the country's budget for education and healthcare combined. This means that less money is available for investment in critical areas such as infrastructure, education, and healthcare. The debt burden also makes it more vulnerable to external shocks such as drops in global oil prices, global supply chain disruptions and increased interest rates. The government does not have the fiscal buffers to cushion against such shocks.
Turning Challenges into Opportunities
While Nigeria's debt situation poses challenges, it also presents an opportunity for the country to forge a path towards economic resilience and growth. There are a number of things that can be done to address Nigeria's debt burden.
Diversification: One important step is to diversify the country's economy away from oil. This will make the government less reliant on oil exports and less vulnerable to fluctuations in global oil prices. This has been monotonously repeated by leading economists and experts for decades but has been slow to gain traction. The effects of the black elixir have been simply too irresistible to shift away from. However, credit must be given to the previous administration for efforts in this regards as Nigeria's GDP growth from non-oil sector has increased significantly. State governments must be held more accountable and play their part in development. Each state should be given a quota to produce based on the resources available in the state as a condition to accessing full Federal Account Allocation Committee (FAAC) Allowances. Otherwise, FAAC should be limited to just payments for essential requirements. This would incentivize production.
Infrastructure Development: Strategic investment in critical infrastructure, such as transportation networks and energy production, can stimulate economic growth, attract foreign direct investment, and create jobs. However, the infrastructure developments must be strategic with the potential to yield significant economic value rather than ego-based/vanity projects that satisfy the personal agendas of a few. We must not even re-invent the wheel... The colonial infrastructure, though dilapidated, provides an existing framework for strategic infrastructure development. Rail networks that link major agro-processing regions to ports to facilitate agricultural exports. This will not only reduce the pressure on the roads but help with reduction of post-harvest wastage due to faster transit.
Fiscal Discipline: Borrowing is not inherently bad; it is the management of it that matters. However, government must prioritize cost-effective borrowing, ensuring that loans are used efficiently and repayments are manageable. Borrowing to invest in productive projects that will yield future revenue is great. Borrowing to pay for recurrent expenditure such as salaries/overheads and debt obligations is disastrous. Also, tackling corruption has become a cliché when put in the context of Nigeria but it cannot be overemphasized. The massive corruption that has taken place in the past and continues to occur, is a large part of what has created this massive debt burden. The irony is that looted funds end up in foreign countries and loaned back to Nigeria at a cost! Strengthening institutions responsible for fiscal oversight, transparency, and accountability can help prevent mismanagement of public funds and improve the efficiency of public spending.
Public-Private Partnerships (PPP): It is evident that government alone cannot tackle the massive development deficit faced in the country and its ability to borrow continues to be constrained. However, the role of government should be to implement policies that will boost economic growth. Collaboration between the government and private sector can accelerate development. This partnership can harness the strengths of both sides, spurring innovation and job creation.
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| https://ppp.worldbank.org/public-private-partnership/sites/ppp.worldbank.org/files/inline-images/Example%20of%20PPP%20Contract%20Types_0.JPG |
There are various PPP models that can be used for both existing government assets and for future development initiatives. For example, existing strategic road networks can be transferred to private sector management on a Operation and Maintenance (O&M) contract, which can allow for tolling and deployment of private resources to maintain security on the roads. This model not only creates jobs but removes the burden of an increased government payroll and overheads and ensures adequate and prompt maintenance of the roads. Joint venture agreements with government part funding and providing guarantees & concessions for building of schools, hospitals, housing etc., will allow for more private sector participation. The Sukuk funded projects have shown that this could be a more successful model. Pension funds sitting on assets of over N15trn could be deployed to this with the right structures.
No More Borrow Pose
Nigeria's debt burden is a serious challenge, but it is not insurmountable. The Nigerian government has taken some steps to address its debt burden. For example, the government has supposedly scrapped fuel subsidy payments, which were a heavy burden on the nation's coffers, introduced a number of tax reforms and has launched a number of initiatives to improve tax collection. However, in an environment whereby businesses find it difficult to stay solvent yet alone make profits, where are the taxes going to come from? Squeezing existing tax payers is counterproductive and may lead to increased tax evasion but providing incentives to increase the tax bracket will probably provide more positive results. Despite the country's dire financial situation, there has not been a concerted effort to reduce the cost of government. The continued sharing of the largesse sends the wrong message to the populace and curtails any attempts to encourage prudency.
More needs to be done to address Nigeria's debt burden. The government needs to accelerate its efforts to increase government revenue, reduce government expenditure, borrow responsibly, and grow the economy. We cannot simply continue to be borrowing to fund consumption and maintaining an image of prosperity for an elite, when the hole continues to get deeper. There is a colloquial saying called "borrow pose", which means giving the impression you own something of value when you actually borrowed it just for clout, attention or to impress. We must tighten our belts and confront reality. Nigeria can no longer afford to borrow pose!
Thanks for taking time out to read this article. Please feel free to send me a message or comment on the article. I am always happy to discuss other perspectives and explore
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