Some governors from the opposition party, after a recent meeting in Uyo, have raised alarm over what they call Nigeria’s rising debt profile. The grumbling governors were raising an alarm that Nigeria’s debt to GDP ratio is becoming very unhealthy.
The debt to GDP ratio is defined as a benchmark that compares “a country’s public debt to its gross domestic product (GDP). By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts.”
A high debt to GDP ratio indicates that a country is struggling to pay its public debts. Public debts are any monies owed to foreign lenders. In situations like this, creditors only tend to lend with significant interest rates or not lend at all. A country’s failure to pay its debt leads to financial distress in both local and foreign markets. Therefore, the guideline is that as a country’s debt to GDP ratio rises, the chances of default also rise.
Before dissecting the country’s current debt to GDP ratio, we must examine the debt to GDP ratios of past governments in Nigeria. Documentation indicates that in the mid-1970s, the nation’s foreign debt was low. In 1970, it was $1.5 billion while in 1975, it was $2.5 billion.
Things became quite unhealthy around 1977 when an unpaid growth rate in Nigeria’s debt became set in stone. By 1979, the unpaid debt was $7.5 billion while by 1980, it was $8.9 billion. This situation was caused by surplus borrowing from foreign countries and corporations at a non-concessional interest rate. This was due to the wane in oil proceeds and the birth of a significant trade deficit.
It was caused by the failure of the nation to either manufacture or pay for the import of our goods and services. As at 2005, Nigeria’s deficit had risen to $30 billion, the majority of which was borrowed from the Paris Club of creditors. Subsequently, both parties proceeded to engage in a series of discussions on an admissible relief on the deficit of $30 billion owed to the Paris Club. By October 2005, both parties confirmed that there was a final resolution for a deficit relief amounting to 18billion dollars. Nigeria paid $12 billion as the Paris club axed the $18 billion. The majority of the $18 billion was administered as support. By April 2006, the agreement was finalized as Nigeria completed its settlement and the nation’s account was free of any deficit to the Paris Club.
President Obasanjo’s government proceeded with the settlement and alleviated the country from its significant debt to the Paris club. The joy was short-lived because, by June 2015, Nigeria’s debt ascended again to $63.8 billion which was the most significant deficit the country had amassed since 2007.
Moving on to recent times, the World Bank carried out a study which indicates that nations whose debt to GDP ratios is higher than 77 percent for an extended period suffer a massive decline in economic growth. This trend is magnified in developing economies where growth declined by 2% in the instance where there is an “extra percentage point of debt over 64%”.
For Nigeria, as of the 31st of December 2020, the total public debt to GDP was 21.61%. This number is less than 40% which is the new limit for Nigeria. As of now, Nigeria’s national debt to GDP is 35.51 percent which is still below the new national limit of 40%. This number indicates that Nigeria’s debt issues do not call for much alarm when placed side-by-side with her GDP. Also, a higher debt to GDP ratio is approved when debt buyers are local investors (nationals) or return consumers who purchase for a purpose.
For example, in Japan, local (domestic) buyers represent 90% while U.S debt is financed by only 60% local. In the case of Nigeria, as of September 2020, the Debt Management Office (DMO) reveals that public debt stock indicates that 37.82% was foreign while local was 62.18%. The public debt stock consists of local and foreign debt stocks of all the State Governments, FCT, and the Federal Government.
Looking at the framework of Nigeria’s loan agreement, especially with China, concerns have been raised about the endangerment of the country’s supremacy. This is because, lately, Nigeria has repeatedly sought China’s help for loans to cover significant infrastructure deficits. Concerns are that there could be clauses that could affect Nigeria’s independence if there is a failure to pay back the loans within the stipulated time to China. Nigeria’s transportation minister, Rotimi Amaechi has disputed such claims. He explained that the clauses were inserted to allow China to explore all paths including negotiation if there ever was a failure to pay back loans.
His words: “They are saying; if you are not able to pay, do not stop us from taking back those items that will help us recover our funds and it is a standard clause, whether it’s with America you signed it or with Britain or any country because they want to know that they can recover their money.’’
Official numbers indicate that the nation’s debt to China rose 136% between September 2015 and September 2020. It rose from 1.4 billion dollars to 3.3 billion dollars. Buhari began his tenure in May 2015. As of March 2020, the Debt Management Office stated that the total monies lent to Nigeria by China were $3.121 billion. This number amounts to 11.2% of external debt stocks of $27.67 billion.
Suffice to say, China does not represent a significant funding source for Nigeria. Also, the nation’s Chinese loans are concessional. This indicates that the terms are magnanimous compared to market loans. The DMO states that a total of eleven projects are financed with the loan. These include a host of sectors from communications, energy, airport terminals and railway, farming and cultivation, and water supply. Patience Oniha, supervisor of the DMO stated in a recent interview that
“Those are all concessional loans and there are no reasons to be worried about them, they’re all project-tied which I think Nigeria should be happy about.”
In terms of borrowing for development projects, the main procedure and demands for Government borrowing are clearly expressed in the Debt Management Office Establishment (ETC) Act, 2003 (DMO Act) and the Fiscal Responsibility Act, 2007. Section 21 (1) of the DMO Act,
“No External loan shall be approved or obtained by the Minister unless its terms and conditions shall have been laid before the National Assembly and approved by its resolution” and Section 41 (1a) of the FRA, “Government at all tiers shall only borrow for capital expenditure and human development, provided that, such borrowing shall be on concessional terms with low-interest rate and with a reasonable long amortization period subject to the approval of the appropriate legislative body where necessary”,
In summary, the budget office of the federation cooperates alongside the MDAs under the depository in which a submitted loan is and also in tandem with the DMO. Subsequently, the acceptance of the Federal Executive Council is requested. If accepted, then the President solicits the agreement of the National Assembly as stated by Fiscal responsibility Act, 2007, Section 41.
It should be noted that only after acceptance of the National assembly that loans are granted and the Nation begins the loan process. Suffice to say, borrowing is a cooperative effort between the Federal Executive Council and the National Assembly.
If there are dangers on our debt profile, there should be sufficient checkpoints to handle it along the chain of approval. While no country should be excited going cap in hand to borrow for every project, the fact however remains, Nigeria’s debts, within the current bracket, is remarkably healthy.