From Okey Onyenweaku, Washington D.C, USA
Perhaps the Nigerian economic managers have become bereft of ideas of how to resuscitate the economy sustainably.
Apart from various other missteps that seem to constitute grievous impediments on the path of getting the job done, the finance minister, Zainab Ahmed’s fumbling and contradictory comments at the just concluded 2022 IMF/World Bank Annual meetings have further exposed the lack of uniform, coordinated and result oriented fiscal plans and processes in the country at the moment.
After a long period of insisting that Nigeria had no debt problem, but only revenue short-fall, the Finance Minister, Zainab Ahmed, finally and tongue in cheek, admitted the contrary, adding that the debt stock is no longer sustainable.
She had argued stridently in the past three years that Nigeria’s debt-GDP ratio was within safe threshold, which became government mantra for contracting more frivolous loans for consumption.
But the chicken, as it were, has come home to roost, as she stated that Nigeria was considering reordering its debts and extending the repayment period of its credit obligations and has appointed consultants to advise the government as it faces a rising debt-service burden.
“It is a fact that Nigeria’s debt has increased over the last three to four years and this increase in debt was occasioned by the different kinds of exogenous shocks that the country faced, which is not unique to Nigeria.
“The situation we have by our 2023 projection is that we will be needing to use about 65 per cent of our revenue to service debt. Unfortunately, the cost of debt service is rising because of the rising interest rate globally, which is resulting also in higher debt service costs.
“But our projection from the debt sustainability analysis is that Nigeria is able to cope with its debt service in 2022 as well as in 2023. We have been engaging financial institutions to look at the opportunity to restructure our debt to further stretch the debt service period to give us more fiscal relief.”
Her declaration sent alarm bell among investors and creditors, and sending government officials scrambling for damage control.
Later in the week, the Debt Management Office, DMO, released a statement to reflect its concern that the minister’s comments were taken out of context.
It said the country was exploring bond buy-back and bond exchanges to manage its debt liability, and it assured investors and creditors that it would “meet all its debt obligations.”
Fears and reassurances notwithstanding, Nigeria’s total debt stock stood at N42.845trillion ($103.312billion) as at June 30, 2022 and it is spending a whooping and indeed, outsized chunk of its revenues to service the huge debt.
Understandably, there are grounds for concern. For example, analysts agree that debt restructuring brings about prolonged negotiations, lack of market access and high uncertainty.
They added that restructuring of debt can deprive nations of desperately needed funds for an extended period, reducing priority spending and investments required to grow the economy and allow the country to service its debts. ‘
“In trying to avoid this downward spiral, some governments may be tempted to accept unfavorable restructuring terms that end up triggering the same problems again in a short space of time,’’ one commentator explained.
Experts further outlined that public debt is how much a country owes to lenders outside of itself. These can include individuals, businesses, and even other governments. The term “public debt” is often used interchangeably with sovereign debt.
Public debt according to them usually only refers to national debt. Some countries also include the debt owed by states, provinces, and municipalities.
Therefore, they counsel the need to be careful when comparing the public debt scenarios between countries to make sure the definitions are using the same parameters.
Nigeria’s ballooning debt profile has raised major concerns from various stakeholders.
The last time Business Hallmark did a count, research showed that Nigeria already owed N42 trillion ($103billion) and nursed plans to borrow N11 trillion more to fund 2022 budget deficit. That is what the federal Government said. FG feels convinced that since its debt-to GDP ratio was still below 40 per cent, it still has a lot of room to accommodate more debts.
In this instance, the government may be borrowing a leaf from economies that have sustainable ways of servicing and refunding the loans as and when due.
In October 2020, the total U.S. debt was over $27 trillion. The debt-to-GDP ratio was 139% at that time. That’s based on the second quarter 2020 GDP of $19.5 trillion.
Whereas the U.S economy and other developed economies are productive and can realise good revenues, Nigeria is still a mono-economy that depends on oil for almost up to 80 per cent of its foreign exchange inflow.
The development does not place Nigeria on the same pedestal with the developed economies. Unfortunately, the debt stock of Nigeria continues to rise as at last week.
An expert who wouldn’t want to be mentioned said governments tend to take on too much debt because the benefits make them popular with voters.
Increasing the debt allows government leaders to increase spending without raising taxes. Investors usually measure the level of risk by comparing debt to a country’s total economic output, known as gross domestic product (GDP). The debt-to-GDP ratio gives an indication of how likely the country can pay off its debt.
Some economists 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 above N42 trillion if conscious efforts were not applied to adequate containment strategies.
Already analysts believe that the nation is being plunged into another round of deeper indebtedness given that debt to revenue now stands at over 100 per cent.
“When debt approaches a critical level, investors usually start demanding a higher interest rate. They want more return for the greater risk,’’ a commentator noted.
‘’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’’, another analyst, who pleaded anonymity said.
A respectable economist and former Managing Director of a big bank in Nigeria, Mr. Emma Nwosu, had in an article warned: “The Minister of Finance begs the question by rationalizing the borrowing spree with her purported 21 per cent Debt to GDP Ratio, relative to the universally acceptable 50 – 55 per cent.
“She ought to know that GDP-based ratios could only be presumed for dynamic economies, with efficient allocation and domestic capacity to respond promptly to government spending and other measures for driving the economy to a new equilibrium.
“It is the Debt to Revenue Ratio that applies to inelastic, mono-product and import-dependent economies like ours. Transition is not imminent either. Our rulers are primarily interested in measures for clinging to power. The ones for economic transformations are secondary and half-hearted.”
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 is easy to determine where Nigeria ranks as regards these parameters at the moment, given the details contained in the 2023 budget, both local and international communities are, however apprised and aware that the country’s economy is very weak as regards literally 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.
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 then, the 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.
But many experts have faulted the line of argument of the government on its preference for using debt ratio to GDP instead of using debt ratio to revenue.
Already analysts believe that the nation is being plunged into another round of deeper indebtedness given that debt to revenue now stands at about 60 per cent.
When debt approaches a critical level, investors usually start demanding a higher interest rate. They want more return for the greater risk, an analyst told BH.
Now, public debt is on the rise again, driven by aggressive borrowing by the present administration and currency devaluation that has further increased the size of the 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, another analyst who pleaded anonymity said.
