Ticking Debt Clock: How Much Can Nigeria's Economy Absorbs?

Ticking Debt Clock: How Much Can Nigeria’s Economy Absorb?

Some Nigerians are worried about the rising debt profile amidst the rising poverty level in the country. The government has been on the side of borrowing, but neglected innovative drives to diversify the nation’s revenue from petrol-dollars support.

Borrowing remains the Federal Government’s core strategy to rescue the economy as well as to pave way for growth and development.

Mr. President, what is your debt repayment strategy like? It is not clear 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 debts 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 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 sum of N32.915 trillion debt owing by the largest economy in Africa has to be shared among Nigerians, each effectively owes at least ₦165,000.

This is however expected to rise after COVID-19 triggered borrowings are factored into the figure in the year.

Ticking Debt Clock: How Much Can Nigeria's Economy Absorbs?

It is unfortunate that very few can afford to pay the amount, and we should anticipate that about 70% to 80% of the population will default if they are to return the amount to creditors.

By economic profile, Nigeria is an emerging economy with a gross domestic product of less than $500 billion, gross external reserves pitched at $35 billion, and 33.3% of the labour force is without jobs.

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 failed with capital spending trending below the budgeted amount. Some pundits in an Un-Nigerian school of thought think the nation can do 15% GDP growth.

GDP Growth

In 2002, Nigeria expanded its economic size by 14.6%. Pro-market evangelists were in the country’s service but progressives think they were corrupt. Somehow, it has become clearer that corruption is relative. But clearly, corruption is synonymous with democracy in Africa.

A huge amount has been allocated to capital projects in Nigeria, but there is less to nothing to talk about. Nigerians only listen to capital project spending figures but they are yet to feel the effects. The roads are still bad, electricity remains erratic and there is still no water.

With the burgeoning debt, one could be tempted to ask where are all the trillions of naira expended on capital projects.

Right now, the Federal Government is showcasing trains, some of which are means for the second industrial era. Rightly, this is rather a good step toward the future. Nigerians are not proud of anything: a working industrial revolution plan, electricity, good roads network, and health care facilities.

Eating three square meals has become a miracle that has to be celebrated among millions of Nigerians as food prices skyrocket. A number of investment experts have continued to be maintaining a stance that the nation’s debt is not sustainable.

Not anymore, as debt service cost and revenue generated by the nation were almost equal early in the fiscal year 2020. The warning is, there may never be another Paris Club discussion for possible debt relief or forgiveness, and FG needs to remember Greece, Venezuela and other countries with similar histories of debt.

South Africa, the most advanced and highly industrialized country in Africa is having trouble breathing. Though, the country is more productive than Nigeria but not as endowed in terms of crude oil.

Nigerian leaders seem to have forgotten the past so quickly. The global economy cannot accept another default crisis.

The hope is, 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 Paris Club announced a final agreement for debt relief worth $18 billion and an overall reduction of Nigeria’s debt stock by $30 billion.

This deal was completed on April 21, 2006, when Nigeria made its final payment and its books were cleared. More than a decade after, many Nigerians are still living below $2 per day by all standards. Many of us that are not us live up to now below the poverty line.

The line has not however been shifted in spite of the fact that 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 truthfulness, faithfulness and accountability of the Ministry.

Available data shows that since 2015, the fiscal authority’s stance is to keep betting on future, growth by taking more loans.

The policymaker changed the nation’s debt mix ratio to 70:30. For every decision, there is always a cost and associated benefit. Natural instinct tends to emphasize the benefit but downplay the cost.

The Institute of International Finance said in a report that Nigeria is paying more for Eurobond compared to peers with a similar risk profile in Africa.

In 2020, more than N2.5 trillion was allocated to service the nation’s debt stock. Subsidy payments consumed huge sums, just at a time when the government is spending more but making less. Borrowing remains FG’s core strategy to rescue the economy as well as to pave way for growth and development.

As an emerging economy, the need to grow the infrastructure base is in the hands of two major economic spenders: The Banks through the provisioning of credits to private investment and the Government.

While Federal Government has been on a spending spree, Banks have been trending conservatively and cautiously since the beginning 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 directed a new policy where banks are expected to lend 65% of their deposits as loans

Banks were practically taking deposits from poor Nigerians and investing in the fixed income market for 16% returns. Before then, the Nigerian economy was starved except for blue chips and oil and gas clients that have always been lenders’ favourites.

Uncertainty in the macroeconomic condition cannot be priced; foreign investors understand the protectionism stance of President Muhammadu Buhari-led administration.

As such, risky and good money often shy away from such a market. Good money goes to 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 sides as a key strategy to build the fortune of the nation.

Nigerians’ reactions have been centred on should government borrow as much, but not often on how FG applies the funds and how efficient is government borrowing.

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 stimulus package for COVID-19 is a small fry, compared to the size of the GDP.

Mr. President, after ramping up debt, what happens? The nation’s economic performance is fragile. Monetarists have a different opinion as they see borrowing as a signal of political pressure. More to that, as apparent now, lack of productive capital is a key issue.

One may be tempted to ask if the government is under pressure to deliver – noting that the first four years were a charade.

Publically independent and analytics minds were not satisfied with the show under President Muhammadu Buhari. The game is still on, and observers are again taking notes. 

The case hangs on both legs.

However, this platform sees government as not borrowing efficiently. Nigerians are afraid that the nation may be out-borrowing her 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 Northern part, then fine but not definitely 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, the leaders and by extension the progressives fear economic restructuring more than revolution.

The reason is simple, government machinery can be used to fight revolutionists but economic restructuring tends to balance power.

Currently, the nation is moving too fast with not much 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% in a quarter, there is a need to pause and reflect on how this will pan out for the nation in the long term.

What this means for the future of Nigeria is that for the next decade; a significant percentage 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 is not contributing to people’s well-being, shouldn’t there be a change in route –at least in the short term?

In 2010, Ireland turned to International Monetary Fund because the nation could not meet its obligations. 

As well, Argentina defaulted on debt payments in 2001, and again in 2014.  To every economic agent, every decision has costs and benefits.

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From a family unit to sovereignty, decisions have to be weighed according to economic value it tends to generate and the associated cost.

The Debt Management Office, Ministry of Finance should be called to attention on some salient decisions as per debt mix. 

Rather than castigating the decision, it is important to forecast what will likely happen with facts and figures.

Looking at government finance, there are guidelines/standards to judge the fiscal and monetary authorities’ decisions in all aspects. 

The nation has not reached a mature level where politicians will not meddle with economic policies in favour of their party’s stance. 

Politicians should objectively disagree on economic matters, not subject good policies to ridicule.

Not many Nigerians know that borrowing is not a bad thing per se and almost all emerging economies engage in some level of a budget deficit.

But the problem is, Nigerians tend to politicize everything and anything. The loudest voice is often accepted as being truthful.

In principle, the analysis of debt stock should be neutral. To do that, one has to weigh actual costs and benefits against predetermined standards. 

To obtain an objective view of the nation’s indebtedness, there are certain metrics that provide support for evaluation and decision-making

How is the debt-to-GDP ratio stand? How is debt service as a percentage of FG revenue? What contribution is tax revenue to FG revenue and how much of tax income can be used to deflate debt value? 

External debt export ratio and 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 just about 10% when some countries are doing double digits.

This means that the economy has the capacity to raise revenues that can be channelled to finance infrastructure. 

The level of infrastructure that supports corporate Nigeria and SMEs would support a willingness to pay tax, not by coercive policies – the only road the current administration has chosen to pass. 

As a matter of fact, Naira is volatile because the foreign receipt is predictable and anchored on movement in the price of the oil market at the global level.

Nigeria may be at a disadvantage in meeting debt service obligations to foreign creditors in the nearest future if perhaps the Naira undergoes another round of devaluation or if the price of oil nosedive significantly.

FG revenue is highly sensitive to movement in the price oil, as non-oil sector contribution to aggregate revenues is low.

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Perhaps, it is time for the government to go corporate way by hedging foreign exchange risk she is exposed to.

Borrowing is not bad for the economy, but the government must be ready to pull the plug on cost at which funds are acquired.

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 Absorbs?

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