Ticking Debt Clock: How Much Can Nigeria’s Economy Absorb?
Some Nigerians worry about the rising debt profile amid rising poverty in the country. The government has leaned on borrowing but has neglected innovative efforts to diversify the nation’s revenue away from petrol-dollar support.
Borrowing remains the Federal Government’s core strategy to rescue the economy and pave the way for growth and development.
Mr. President, what is your debt repayment strategy like? It is unclear whether the Federal Government has one. The next question is: who will pay Nigeria’s debt? The next President will most likely complain about the sky-high debt profile.
To support the fiscal year 2021 budget, Nigeria has initiated a process to raise foreign currency loans from the Eurobond market. On Tuesday, President Muhammad Buhari officially asked the Lawmakers to approve about $6.2 billion in foreign loans as part of a new borrowing plan.
The fact remains that the government is borrowing because it cannot raise aggregate revenue, which would technically require thinking, strategy, and coordination.
It is easier for a sovereign to borrow than to raise aggregate revenues, but that was not what the progressives promised.
Today, if the largest economy in Africa’s debt of N32.915 trillion is shared among Nigerians, each owes at least ₦165,000. However, this is expected to rise once COVID-19-triggered borrowings are factored into the annual figure.
Unfortunately, very few can afford to pay this amount, and we should anticipate that about 70% to 80% of the population will default if they are to repay creditors.
By economic profile, Nigeria is an emerging economy with a gross domestic product of less than $500 billion, gross external reserves of $35 billion, and 33.3% of the labour force unemployed.
From 11.3% in 2010, the annual gross domestic product (GDP) growth rate nosedived to less than 2% in 2019 and came negative in 2020.
The government projected +3% for 2019, but the estimate fell short, with capital spending trending below budget. Some pundits in a non-Nigerian school of thought think the nation can achieve 15% GDP growth.
GDP Growth
In 2002, Nigeria expanded its economic size by 14.6%. Pro-market evangelists served the country, but progressives think they were corrupt. Somehow, it has become clearer that corruption is relative. But in Africa, corruption is clearly synonymous with democracy.
Nigeria has allocated a huge amount to capital projects, but there is little to nothing to talk about. Nigerians only listen to capital project spending figures, but they have yet to feel the effects. The roads are still bad, electricity remains erratic, and there is still no water.
With the burgeoning debt, one might ask where all the trillions of naira go on capital projects.
Right now, the Federal Government is showcasing trains, some of which are meant for the second industrial era. This is a good step toward the future. Nigerians are not proud of anything: a working industrial revolution plan, electricity, a good road network, and health care facilities.
Eating three square meals has become a miracle to celebrate for millions of Nigerians as food prices skyrocket. Several investment experts have maintained that the nation’s debt is unsustainable.
No longer, as debt service costs and revenue generated by the nation were almost equal early in the fiscal year 2020. The warning is that there may never be another Paris Club discussion on possible debt relief or forgiveness, and FG needs to remember Greece, Venezuela, and other countries with similar debt histories.
South Africa, Africa’s most advanced and highly industrialised country, is struggling to breathe. Though the country is more productive than Nigeria, it is less endowed with crude oil.
Nigerian leaders seem to have forgotten the past so quickly. The global economy cannot accept another default crisis.
The hope is that, as long as oil is there, Nigeria has hope. This hope is threatened by the global drive for clean energy. Electric-powered vehicles, solar energy, etc. would reduce the demand for oil.
In October 2005, Nigeria and the Paris Club announced a final debt-relief agreement worth $18 billion, reducing Nigeria’s debt stock by $30 billion.
Nigeria completed this deal on April 21, 2006, when it made its final payment and cleared its books. More than a decade later, many Nigerians still live on less than $2 per day by all standards. Many of us who are not us live up to now below the poverty line.
The line has not, however, shifted, even though the majority voted for a populist government in anticipation of a better life afterwards. The nation’s Humanitarian Ministry has been tagged a special purpose vehicle for embezzlement.
From N-Power funding to COVID-19 disbursement, many Nigerians have expressed reservations about the Ministry’s truthfulness, faithfulness, and accountability.
Available data show that since 2015, the fiscal authority has kept betting on future growth by taking more loans.
The policymaker changed the nation’s debt mix ratio to 70:30. Every decision has a cost and an associated benefit. Natural instinct tends to emphasise the benefit but downplay the cost.
The Institute of International Finance said in a report that Nigeria pays more for Eurobonds than peers with a similar risk profile in Africa.
In 2020, the government allocated more than N2.5 trillion to service the nation’s debt stock. Subsidy payments consumed huge sums, just as the government spent more but made less. Borrowing remains the FG’s core strategy to rescue the economy and pave the way for growth and development.
As an emerging economy, the need to grow the infrastructure base rests with two major economic spenders: banks, through providing credit for private investment, and the Government.
While the Federal Government has been on a spending spree, Banks have been conservative and cautious since the start of the current dispensation in June 2015.
In 2019, the Central Bank of Nigeria noted that Banks were actively trading in the fixed-income market and introduced a new policy requiring banks to lend 65% of their deposits.
Banks were effectively taking deposits from poor Nigerians and investing them in the fixed-income market for 16% returns. Before then, the Nigerian economy was starved of investment except for blue-chip and oil-and-gas clients, which have always been lenders’ favourites.
Uncertainty in macroeconomic conditions cannot be priced in; foreign investors understand the protectionist stance of the President Muhammadu Buhari-led administration.
As such, risky, good money often shies away from such a market. Good money goes where the fiscal stance to borrow for infrastructural development and support broad-based growth is a noble decision.
Obviously, the pattern remains the same. We have a government that really wants to spend money but lacks the expertise to adjust demand and supply as a key strategy for building the nation’s fortune.
Nigerians’ reactions have centred on whether the government should borrow more, but less often on how the FG uses the funds and how efficient government borrowing is.
Keynesians’ perspective on government borrowing is simple and succinct: the government should spend itself out to reflate economic performance. Especially in times like this, the COVID-19 stimulus package is small fry compared to GDP.
Mr. President, after ramping up debt, what happens? The nation’s economic performance is fragile. Monetarists see borrowing differently, viewing it as a sign of political pressure. Moreover, as is apparent now, a lack of productive capital is a key issue.
One may be tempted to ask whether the government is under pressure to deliver, noting that the first four years were a charade.
Publicly independent and analytical minds were not satisfied with the show under President Muhammadu Buhari. The game is still on, and observers are taking notes again.
The case hangs on both legs.
However, this platform sees the government as not borrowing efficiently. Nigerians are afraid that the nation may be out-borrowing its capacity, while this may not be true technically; their fears ought to register in the scheme of things
What is Nigeria borrowing to do, really? If the answer is to rebuild the North, then fine, but not necessarily the southern states. I borrowed this clue from what Mr President allegedly told Kim Yong, the 12th President of the World Bank, to concentrate efforts in the North.
FG is not earning enough. Yet leaders, and by extension progressives, fear economic restructuring more than revolution.
The reason is simple: the government machinery can fight revolutionists, but economic restructuring tends to balance power. Currently, the nation is moving too fast, with little to show for it.
With debt stock at N28.6 trillion as of the first quarter of 2020 and debt servicing taking as much as 90% of a quarter, the nation needs to pause and reflect on how this will pan out in the long term.
For the next decade, this means a significant share of the annual budget would be devoted to financing past decisions with limited or no current economic benefits. FG infrastructure spending rolls in a trillion is laudable but where are the projects?
Why has there been no impact in the job market?
If priority investment isn’t contributing to people’s well-being, shouldn’t the route change, at least in the short term? In 2010, Ireland turned to the International Monetary Fund because the nation could not meet its obligations.
Argentina also defaulted on debt payments in 2001 and again in 2014. To every economic agent, every decision has costs and benefits.
Read Also: FG is Selling ₦150 Billion Sukuk to Investors at 11.2%
From a family unit to sovereignty, decisions must be weighed by the economic value they tend to generate and their associated costs.
The Debt Management Office, Ministry of Finance, should be called to attention on some salient decisions as per the debt mix.
Rather than castigating the decision, it is important to forecast what will likely happen, supported by facts and figures.
In government finance, guidelines and standards help judge the fiscal and monetary authorities’ decisions across all aspects.
The nation has not reached a level of maturity where politicians will not meddle with economic policies in favour of their party’s stance.
Politicians should disagree objectively on economic matters, not ridicule good policies.
Not many Nigerians know that borrowing is not bad per se, and almost all emerging economies run some level of budget deficit.
But the problem is, Nigerians tend to politicise everything and anything. The loudest voice is often accepted as being truthful. In principle, analysing debt stock should be neutral. To do that, one has to weigh actual costs and benefits against predetermined standards.
To get an objective view of the nation’s indebtedness, certain metrics support evaluation and decision-making.
How does the debt-to-GDP ratio stand? How is debt service as a percentage of FG revenue? What share of FG revenue comes from tax revenue, and how much tax income can be used to reduce debt? What are the external debt export ratio and the external debt-to-external-income ratio?
Nigeria is on the safer side with a debt-to-GDP ratio at a midpoint between 20% -30% as against the global standard of 60%. At the last count, tax-to-GDP is about 10%, while some countries are in double digits.
This means the economy can raise revenue to finance infrastructure. The level of infrastructure that supports corporate Nigeria and SMEs would encourage a willingness to pay tax, not through coercive policies, the only road the current administration has chosen.
In fact, the Naira is volatile because foreign receipts are predictable and anchored to movements in global oil prices. Nigeria may struggle to meet debt service obligations to foreign creditors in the near future if the Naira undergoes another round of devaluation or if oil prices nosedive significantly.
FG revenue is highly sensitive to oil price movements, as the non-oil sector contributes little to aggregate revenues.
Read Also: Nigeria to record its largest economic decline in Q2– FSDH
Perhaps it is time for the government to go the corporate way and hedge the foreign exchange risk it faces, too. Borrowing isn’t bad for the economy, but the government must be ready to pull the plug on the cost of funds. This is no less important than showing people where the money goes. After all, it is our commonwealth!
Ticking Debt Clock: How Much Can Nigeria’s Economy Absorb?
E: editor@dmarketforces.com
