Published On: Mon, Jul 9th, 2018

Nigeria wallows deeper in debt

–as debt service ratio surges


Despite warnings from international financial agencies and several independent local economists, Nigeria’s fiscal managers seem to be increasingly pushing the economy’s head below safe debt water lines. Indeed every Nigerian alive today owes a debt of more than N126, 150 per person. That is at a total  nominal national debt of N22.707trillion. The debtors list includes day old babies. Investigation suggests that there is a growing consensus among economists that every individual in the country will owe even more when the country borrows to enable it fund the N2trillion budget deficit in 2018.

Analysts explain that debt occurs when money is owed by one party, the borrower or debtor, to a second party, the lender or creditor. The debt may be owed by a sovereign state or country, local government, company, or individual.

Kemi Adeosun, Finance Minister

Nigeria’s ballooning debt profile has raised major concerns from various stakeholders. The last time Business Hallmark researched  the  country’s debt profile  it was discovered that the Federal Government’s domestic debt was hovering around N15.9 trillion, while domestic debt owed by the states and the Federal Capital Territory (FCT)  flickered at N3.348 trillion.

The external debt of the Federal Government, States and the FCT stood at N6.7 trillion, making a gross total of N22.7 trillion.

The Director General of the DMO, Patience Oniha, observed that proceeds of $2.5 billion Eurobond, issued a few months ago, would be deployed to pay maturing domestic debt, starting with N130 billion Nigeria Treasury Bills (NTBs), repaid on March 1.

“The figures show that Nigeria’s debt management strategy, which has the objective of reducing the ratio of domestic debt in the portfolio, while the ratio of external debt is increased with a target of 60 per cent domestic and 40 per cent external, is being achieved’’ Oniha said adding that

“The composition of the debt stock as at the end of 2017 showed that external debt was 26.64 per cent of the portfolio, up from 20.04 per cent in 2016, while domestic debt was 73.36 per cent, down from 79.96 per cent in 2016.

The DMO however, explained that, “Nigeria’s debt continues to be sustainable and it is well within the threshold of 56 per cent for countries in Nigeria’s peer group.”

Unfortunately, as the debt stock of Nigeria continues to rise even with last week signing of $475 million loan facilities agreement with President Macron of France, there is still confusion whether the country has a functional debt management strategy.

From the budget of N9.12 trillion for 2018, analysts revealed that about N1.6trillion will be borrowed. According to them, while the component of domestic borrowing is N793billion, the foreign part stood at N849billion.

However, ‘the Bull in China’s shop’ is in fact, the Debt sustainability of the nation State. Interestingly while the DMO claims it has a good hang on the country’s debt in terms of sustainability, an intense debate has been ignited.

Analysts have criticised the parochial perspective through which the government has based and defined the country’s debt sustainability.

Some of them has explained that a country’s debt is sustainable if it is able to finance its debt obligations without external help or going into default.

‘’There is no single accepted measure of debt sustainability but the two most common metrics are the Debt-GDP ratio – which compares the size of a country’s debt to its economy – and Debt Servicing-Government Revenue ratio – which compares how much a country pays in debt financing with how much it earns in a given period.’’, they maintained.

The fear of many discerning Nigerians has been that the country’s debt may be headed to about $30billion if conscious effort is ignored to apply adequate strategies.

Dr. Alex Otti has opened the eyes of many Nigerians to the sad and alarming situation of the country’s indebtedness. He stressed that the issue was not in accumulating debt but in the capacity to service it.

Economists define debt service as the cash that is required to cover the repayment of interest and principal on a debt for a particular period. … This ratio helps to determine the borrower’s ability to make debt service payments because it compares the company’s net income to the amount of principal and interest the firm must pay.

According to them debt service ratio is the ratio of debt service payments (principal + interest) of a country to that country’s export earnings. A country’s international finances are healthier when this ratio is low.

‘’About 21% of the budget or N2.2 trillion is set aside for debt service. Since projected total revenue projection is N7.1 trillion, it also means that 31% of revenue will go into debt service within the fiscal year. This is actually a matter that should be of major concern to us. It stands without contradiction that if for some reason, we borrow more than we envisaged to fund the budget, this number will go up. It is a big drag on the budget and a threat to the economy. This speaks more to the issue of debt sustainability rather than the misleading argument about debt to GDP ratio. Like we had argued in the past, you cannot service debt with GDP,’’ said Dr. Alex Otti in an article he published recently in a National Daily.

He added, ‘’Debt can only be serviced with revenues. We must rein in this expense head if we must make progress with our much-desired economic transformation. Tied to this is the issue of recurrent versus capital expenditure. We seem to be stuck on the 70:30 rule. No matter how much we sermonise against this, we end up returning to it. Even though in the budget some progress was made, the actual result remains very minuscule. Capital expenditure of N2.87 trillion is 31.5% of the budget. That leaves recurrent expenditure at 68.5%. The level of infrastructural decay, which by the way, we have lived with for decades now, requires quantum leap adjustment from the 70:30 rule’’,

There is a consensus that the level of debt that an economy can bear depends on numerous factors: the economy’s expected rate of economic growth; whether domestic or foreign borrowers, or domestic government institutions, own debt; the country’s fiscal capacity; inflationary expectations; currency risk; and default risk. While it easy to determine where Nigeria ranks in this parameter now given the new budget, both local and international communities are aware that the country economy is very weak in every standard measurement. However, Nigeria’s debt to Gross Domestic Product may look good, but analysts believe that the devil is in the details of debt to revenue and servicing.

The drama surrounding Nigeria’s debt profile which keeps rising by the day, reminds Nigerians of what happened in 2006 scene when Nigeria was involved in the Paris Debt Club forgiveness where the country had most of its foreign debt forgiven by international creditors.

Keen observers of the country’s economy are beginning to see signs of a repeat of the 2006 debt over hang that put Nigeria at the mercy of foreign creditors.

As the country’s projected to realise N7.1 trillion, it is expected that 31% of revenue will used to service debt within the fiscal year.

‘’ Now, public debt is on the rise again, driven by aggressive borrowing by the present administration and currency devaluation that increased the size of foreign debt. Many international bodies such as the World Bank have raised concern over the speed and scale of Nigeria’s borrowing, often highlighting its weak Debt Servicing Ratio’’, an analyst who pleaded anonymity said.

World Bank, lead Economist, Chuha-Pole had during a Biannual Analysis of African Economies in Washington D.C on April told Nigeria that although the country’s debt remained low going by the debt to Gross Domestic Product ratio, interest payment had been rising.

“Interest payment as a share of government revenue is quite high. It raises issue of sustainability,” she stated.

“The rate at which countries are accumulating debts is very high. Our countries need to pay attention to the rate at which debts are rising.” She added.

Unfortunately, Nigeria’s debt is rising at a time that her economy is very weak with double digit inflation, high unemployment rate, insecurity among other challenges.

The Chief Executive Officer, Nigeria Economic Summit Group, Mr. Laoye Jaiyeola says

“If the government pays attention to these drivers of sustainable inclusive growth in decision making, growth is bound to take place. But if less attention is paid to these factors, we will take one step forward and two steps backward. Whatever we do, we need to address these critically.”

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