GDP Growth and Debt Sustainability: The Case for Reasonable Borrowing

When we mention Gross Domestic Product (GDP), we talk about the total market value of all goods and services produced in a country’s economy during a specified period (usually a year). It includes all final goods and services which are produced by the economic agents located in that country, regardless of their ownership, and can be resold in any form. There are three ways to determine GDP, all of which should, theoretically, give the same result.

These are the production (or output or value-added) approach, the income approach, or the speculated expenditure approach. It is representative of the total output and income within an economy. The most direct of the three is the production approach, which sums the outputs of every class of enterprise to arrive at the total. Therefore, GDP growth rate is an important indicator of the economic performance of a country. 

The National Bureau of Statistics (NBS) has released statistics that shows a 5.01 percent growth in Nigeria’s Gross Domestic Product (GDP) in the second quarter of 2021. This symbolises recovery, as a 5 percent quarterly increase is the best so far since the commencement of the current administration, that is, six years ago. The Q2 2021 growth rate was also higher than the -6.10% growth rate recorded in the second quarter (Q2) of 2020 and the 0.51% recorded in the first quarter (Q1) of 2021 year-on-year, following the negative growth rate in the second and third quarter of 2020, and indicating the return of business and economic activities. 

From the injection, domestic trade increased by 22 percent, as a result of the trade boom after the pandemic lockdown was lifted. There could have been more increase in growth if Benin Republic border, which has been closed for 16 months, was not in place. 

According to the economic report by the National Bureau of Statistics, Nigeria is one of the strongest economies in Africa. Services is the largest sector of the economy, accounting for about 50 percent of total GDP. One of the fastest-growing segments in services is Information and Communication Technology, which accounts for about 10 percent of the total output. Agriculture, which in the past was the biggest sector, now weighs around 23 percent. Crude Petroleum and Natural Gas constitute only 11 percent of total GDP, which serve as the main exports. Industry and Construction account for the remaining 16 percent of GDP.

The breakdown of the report has clearly shown that the growth experienced was in the non -oil sector, communication, trade, electricity, manufacturing, and agriculture. Regardless of the government ban on buying telephone SIM cards and Twitter, telecommunications still recorded a 5.9 percent growth. On the other hand, in the Oil sector, according to the NBS, the real growth of the oil sector was 12.65% (year-on-year) in Q2 2021, indicating a decrease of 6.02% points relative to the growth rate recorded in the corresponding quarter of 2020. Data from the report showed that growth decreased by 10.44% points when compared to Q1 2021, which was 2.21%.

Even with the increase in the second quarter of the nation’s GDP, it is still not enough to solve the debt exposure of the country. Recently, Nigeria was listed among the debt risk exposed countries across the world by the World Bank. According to the report, Nigeria ranked fifth, with a debt exposure of $11.7 billion among the top 10 countries with the highest debt risk exposure. The top four countries are India with $22 billion, Bangladesh ($18.1 billion), Pakistan($16.4 billion), and Vietnam ($14.1 billion). In 2022, the organisation said the Single Borrower Limit (SBL) has been set at $45 billion, about 25 percent of $180.9 billion of equity as of June 30, 2021. As of June 30, 2021, the ten countries with the highest exposures accounted for 66% of IDA’s total exposure.

 Using loans to fund infrastructural projects by developed and developing economies has become a habit, as it helps to enhance economic development. However, when new loans are used to fund or service previously acquired loans, it becomes a problem, as is the case with Nigeria. An escalating debt profile presents serious obstacles to a nation’s path for economic growth and development. The cost of servicing debt may expand beyond the capacity of the economy to cope, thereby impacting negatively on the ability to achieve the desired fiscal and monetary policy objectives

The Minister of Finance, Dr. Zainab Ahmed, has reported that Nigeria has spent a sum of N1.8 trillion on debt servicing between January and May 2021, despite only spending N973.13 billion on capital expenditure, and earning just N1.84 trillion revenue.

 Nigeria’s debt sustainability, like other African countries, has been subjected to intense review in recent weeks, with the Director-General of the World Trade Organisation (WTO), Dr. Ngozi Okonjo-Iweala, and the President of AFDB, Dr. Akinwumi Adesina, expressing worries the continent could relapse into a debt trap. Despite all these debt obligations, Nigeria continues to seek further domestic and external loans to run its affairs.

According to Okonjo-Iweala in 2011, she said that Nigeria’s domestic debt stock has dealt a heavy blow to the Gross Domestic Product (GDP), which measures the aggregate contributions of goods and services produced in the country. Domestic debt reduction in Nigeria has taken centre stage for conversing realistic pricing of petroleum products in Nigeria, as the domestic debt profile has been rising astronomically and if not controlled, could create some unfavourable consequences like crowding out private sector investment, poor GDP growth, etc.

The Federal Government (FG), since last year, has relied heavily on a slew of borrowings, largely from multilateral organisations such as the IMF, World Bank, and AFDB. The huge reliance on the debt market was necessitated by shocks to revenue generation. Similarly, the FG appears to be leaning heavily towards the external debt market in 2021, to spend its way out of the economic slowdown. However, the concern remains Nigeria’s rising debt sustainability risk.

Recently, President Muhammadu Buhari submitted a request for the approval of additional N2.3trillion ($6.2billion) worth of external debt to the Senate. According to the request, the loan is aimed at part financing the N5.6trillion budget deficit for 2021, with a critical focus on funding capital expenditure. This loan request had been provided as part of the 2021 Appropriation Act.Interestingly, the FG recently got approval for $1.5billion and 995.0million Euros worth of multilateral loans a few weeks ago. The proposed new borrowing is about one-third of the total N46.3 trillion the government intends to spend between 2022 and 2024, while capital projects will take just one-fifth of the spending estimates.

A look at the historical data shows Nigeria’s total public debt has grown by $19.51 billion (over N8 trillion) in the past five years and is poised to rise to over N40 trillion by 2024.

Getting a loan has both positive and negative effects. Looking at it positively, Nigeria needs these loans to fund projects; the major problem facing the country is currency market crisis, as a result of insufficient supply of dollar, which can be solved by attracting significant capital inflow.

Similarly, Nigeria should concentrate on exporting more, to earn more foreign export proceeds, rather than making oil the major source of export, which has been affected by the cut in crude oil production quota by OPEC.

Furthermore, a rising debt burden may constrain the ability of the government to undertake more productive investment programmes in infrastructure, education, and public health. To avoid such a situation, the quantum and structure of the nation’s debt must be carefully managed in a manner that is consistent with the country’s growth and development aspirations.

Nevertheless, the government should place an embargo on new loans, especially to the state government and other government parastatals, except for important economic reasons which are inevitable, and for projects which are self-floating and self-sustaining. Government policy that deters savings (such as negative real interest rates) encourages not only capital outflows but also contributes to debt accumulation because external financing is needed to bridge the gap. All these domestic factors increase borrowing needs and lower the earnings from exports, and in the process reduce the ability to meet the rising debt service obligations.

The best and most durable solution to the reviving of economic growth is to adopt the leadership and management styles that inspire confidence in those who will be involved in the restructuring of the economy. Restructuring of the economy also involves restructuring of interests that are conflicting and have to be balanced. The essence of this, however, is that leadership role is crucial in the overall development of any economy. The leaders in Nigeria should transit from ineptitude to competence; moral corruption to moral decency; parochialism to purposeful leadership that serves the people.

Categories: Economy, Features

Tagged as: ,