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Should we be worried about Nigeria’s debt?

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By Abraham Adekunle

Nigeria’s external debt stock has risen to over $70 billion as of 2021.

Within a space of about 50 years, Nigeria’s total external debt stock rose from less than $1 billion in 1970 to over $70 billion in 2021. This is due to unpaid foreign loans and accrued interest arrears. According to statistics, more than two-third of the debt is owed to multilateral institutions, including the World Bank, the International Monetary Fund (IMF) and the African Development Bank. Less than 10 percent is owed to China, while the rest is to other bilateral lenders. Nigeria’s Debt Management Office has confirmed that loans from China are wholly tied to 15 infrastructure projects ranging from transportation, water and telecommunications to electricity. At 2.5 percent interest rates, the debts are expected to be fully paid back within 30 years. That is, 20 years maturity plus seven years grace period.

Nigeria’s current level of foreign debt is not only raising the risk of sovereign default (which is the failure of the Federal Government to pay its debt) but also absorbing and sucking up the entire government budgetary space. Because of this, the country has little room to spend on other pressing national needs. In order to unravel how to resolve the debt crisis, the forces that shape Nigeria’s debt profile and what can be done to reverse government finances from sinking deeper into the red are of great concern.

The poor bears the brunt of lack or more of government spending.

In an ideally corruption-free public sector, the poor benefit the most when the government spends and the same poor loses out when the government cuts its spending. This is because state-owned, state-funded, and state-run public goods, such as schools, hospitals, dams, electricity, roads, etc., are substantially relied upon by the poor as a means of raising welfare levels in that the rich can afford or buy education and healthcare services from private schools and private hospitals, respectively. However, because it is practically an exercise in futility to expect that kind of environment in the public sector, the primary beneficiaries of government budgets in addition to the poor are typically the elected and the unelected corrupt government officials and bureaucrats. They leak away resources from government coffers, hence, providing more grounds for borrowing and mounting public debt in order to finance and oil the engine of corruption.

Federal Government of Nigeria borrows from countries, multilateral organizations, and other bodies in the world like other nations do. Its budget is significantly tied to changes in the oil prices in the world. So, in periods of falling oil revenues, the government is often quick to request loans to finance deficits. Otherwise, the decline in revenues will always come at the expense of investments in infrastructure – accumulation of physical capital stock such as roads, new schools, hospitals, dams etc. The government must pay its workers and fund operations, such as providing national security. In simple words, the government chooses to borrow during periods of low oil prices so that its recurrent expenditure will have to hold up. This is why workers are not laid off at the slightest downturn from public employment.

Two main forces are driving the rise of the external national debt.

First, the rate at which the country borrows is concerning. According to the World Bank’s International Debt Statistics, for the past 50 years, Nigeria was withdrawing more than $2 billion a year on average from its loan commitments. Nonetheless, the significant rise in Nigeria’s debt stock is caused by disbursements on external loans within the last decade. In the lead-up to the 2015 general elections, about $9 billion was withdrawn. This is five times the average of initial withdrawals. Similarly, in the two years (2017 and 2018) preceding the last general elections, close to $25 billion was drawn. This pattern could be linked to the absence of strong political and legal institutions. When combined with the presence of multiple powerful groups, it fosters the mismanagement of public finance, possibly to finance political campaigns, such as in the case of incumbents seeking re-elections before the massive debt accumulations.

Another reason why Nigeria’s debt stock has been expanding is the debt management strategy, especially how the debt was serviced by various regimes. To service a loan or debt is to pay down the debt stock. That includes paying back part of the principal and the accrued interest arrears. For instance, for the past five decades, Nigeria has been servicing its debt at an annual average rate of roughly 15 percent (roughly $2 billion) of its total external debt. Between 2007 and 2014, when world oil prices were around $100 per barrel (an opportunity for Nigeria to significantly lower its debt level), debt service payment was ironically at its lowest: an average of less than $1 billion per year.

Rising debt levels should not raise immediate concerns.

Experts have said that the rising debt levels of the country should not arouse immediate concerns in the people if the situation comes with a falling debt-to-GDP ratio. The ratio is defined as the total debt stock divided by the size of the economy. It reveals the fraction of the economy being eaten up by debt and the extent to which the debt benefits the economy. If a nation’s debt stock is rising and at the same time its debt-to-GDP ratio is declining, it means the country is making the most of its debt and that should not be a cause for alarm.

Related Link

Debt Management Office: Website

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