Nigeria’s debt profile has become a rising cause for concern for many economic analysts with the growing year-on-year debt accumulation. The issue of rising public debt is one of Nigeria’s biggest economic problems. The Data Management Office (DMO) revealed that Nigeria’s total debt stock in 2019 amounted to N27.4 trillion.
Within three months from April to June 2020, the debt rose by N2.38 trillion. This was following a rise in debt stock that led to the $3.36 billion budget support loan from the International Monetary Fund (IMF) and new domestic borrowings to help finance the revised 2020 Appropriation Act.
The 2020 debt profile shows that the Federal Government accounts for N15.46 trillion, while the 36 states and the FCT make up a combined N4.19 trillion of the total national debt commitment. Lagos State has the highest debt stock among the 36 states and the FCT.
It was revealed that simply adjusting the exchange rate raised Nigeria’s debt profile by N1.5 trillion. This means that an increase in the country’s exchange rate resulting from the pressure on the naira may lead to a significantly high debt rate consequently.
These debt instruments include the Nigerian Treasury Bills (NTBs); Federal Government of Nigeria (FGN) Bonds; Treasury Bonds; FGN Savings Bonds; and FGN Sukuk. This also points out that the country would spend almost a quarter of its budget on offsetting the debts.
Amina Mohammed, the deputy secretary-general of the United Nations (UN) described the state of Nigeria’s debt profile as worrying, while the IMF referred to the country’s Debt-to-GDP ratio as ‘risky’.
According to the Debt Management Office, there is a need for the Federal Government to reevaluate its borrowing plans with the COVID-19 pandemic and its global hit on the economy and the international capital market.
Although there have been attempts to diversify, Nigeria remains dependent on oil for 90% of its export earnings. This is because almost two-thirds of the economy remains in the informal sector. Also, economic growth remained slow even with a rapidly growing population.
The possibility of evading the debt trap is quite minimal as the current 2021 budget seeks to borrow N4.28tr, further increasing Nigeria’s debt servicing. The Nigerian government will borrow $4.34bn from the domestic market to partly finance the budget deficit.
The major problem with borrowing is piling interest rates. Based on the World Bank Debtor Reporting System on Nigeria, the country is due to pay $3,610,082,000 in 2021. Tejvan Pettinger, an Economist advanced a long-held agreed economist theory that states that the rising debt would raise the amount of money governments must pay in interest to borrowers. As Nigeria seeks to offset her debt, she would have to borrow even more.
This means that Nigeria’s loan creditors like the World Bank and the Exim Bank of China could require higher interest rates to assist with more cash to an indebted borrower.
With interest filling up a greater degree of the budget, what would be left is little to spend on development programmes. If the government intends to maintain the same level of benefits and services without having more deficits, there would be a need for more revenue.
The Congressional Budget Office (CBO) stated that Nigeria could head into ‘a debt spiral’ except the global oil market which holds a larger part of the country’s revenue appreciates. Apart from this, Nigeria will continue to fund its debt even with the critical state of its socio-economic environment. This would decrease the amount invested in the private sector.
The report also revealed that debt held by the public will rise dramatically in the coming decades reaching 106 percent of GDP by 2039.
As the debt continues to rise, investors will begin to lose confidence in the government’s ability to pay back borrowed funds. ‘Though there is no sound mechanism for determining if and when a fiscal crisis will occur, says CBO, ‘All else being equal…the larger a government’s debt, the greater the risk of a fiscal crisis.’
Zainab Ahmed, Minister of Finance, Budget, and National Planning stated that the challenge of the country is not in debt level but in the area of means to raise revenue as a substitute for borrowings. It is high time the country responds to its rising federal debt.
‘As the threat of debt vulnerability continues, a coordinated domestic revenue expansion with simultaneous fiscal prudence still remains the key to addressing the weak fiscal position of the economy,’ the Monetary Policy Committee noted.