Experts raise concerns over FG’s plan to fund deficit from privatization
Zainab Ahmed, Nigeria's Finance Minister

BY EMEKA EJERE

Concerns of imminent debt distress being raised by economic experts has got more credence with the International Monetary Fund (IMF) 2021 Article IV revealing that the nation spent 86 per cent of its revenue on servicing debt in 2021.

The experts had while reacting to plan by the federal government to add N6.3tn new debts to Nigeria’s current debt stock, kicked against what they called government’s proclivity for debt, describing it as unsustainable, and calling for increased productivity with a view to boosting revenue.

However, Nigeria’s total debt by end of December 2021 was only 30 per cent of South Africa’s debt, yet the former’s debt service appears too expensive, according to analysts.
South Africa’s budget office estimated its debt service-to-revenue in 2021 at 20 per cent, which implies that for every five rand raised by the government, only one rand was spent on servicing debt.

According to the Debt Management Office (DMO), Nigeria’s total debt as at December 2021 was $94.166bn, while South Africa’s total debt at the same period was $261bn, according to the country’s National Treasury and Bloomberg.

Data from the DMO showed a rise in Nigeria’s total public debt from N32.92 trillion in 2020 to N39.56 trillion at the close of last year. With the federal government’s plan to add N6.3tn new debts to the current debt stock, the country’s total debt stock may be pushed to N45.86tn by December 2022.

Statistics from Egypt’s central bank revealed that the country’s debt service-to-revenue was 20.5 per cent in 2021, while Kenya’s and Uganda’s were estimated at 60 per cent and 27-30 per cent respectively.

Analysts say Nigeria’s debt service is very expensive because of the perception of investors of the country as high risk. Nigeria’s high debt service-to-revenue is also attributed to its low revenue generation.

They are worried that Nigeria is not raising enough revenue from an economic size of over $400 billion, wondering why policy makers are not thinking out of the box.

Nigeria is seven times Ghana’s population of 31 million. Yet, the country’s revenue to GDP is nine per cent, while that of Ghana is 13 per cent. According to the DMO, Kenya and Angola have a revenue-to-GDP ratios of 16.6 per cent, and 20.9 per cent respectively.

The Chief Executive Officer of Centre for the Promotion of Private Enterprise (CPPE), DrMuda Yusuf, said that debt service ratio was a function of the magnitude of the debt and its cost.

According to Yusuf, investors perceived Nigeria as high-risk, explaining that risk premium must be paid when bonds were perceived as high-risk.

Yusuf said, “If the amount you are borrowing is high, you also have to pay more. Also, Nigeria borrows at expensive rates, especially the Eurobonds. Sometimes, we celebrate that our Eurobondsare oversubscribed, but the yields are very high when you compare them with other countries.”

On his part, a professor of Economics, SheriffdeenTella, criticised the federal government for the rate of increasing debt, pointing out that the money spent on debt servicing is eating deep into the government’s revenue, which makes borrowing an unsustainable form of financing.

He said, “We are already in debt distress if we are spending a large proportion of our revenue on debt servicing, we are in trouble and our revenue is not growing. The Minister of Finance recently said we will borrow from Eurobonds to finance subsidy. What kind of economics is that? The Minister of Finance deserves to be given an award for patronising the debt market. She has made Nigeria the most active debt in the world. This is not good enough.

“We are already in distress in terms of debts because we are spending our revenue, which is declining, on debt servicing and fuel importation. It is unfortunate.

“What is the money borrowed used for? Every time, we hear of things being underfunded. Even the NNPC said they are underfunded which is why they were unable to meet up with the OPEC quota for oil production. So, what really is funded in this country?”

He further urged the federal government to stop borrowing and focus on how to boost revenue, especially by removing the fuel subsidy.

President of Lagos Chamber of Commerce and Industry (LCCI) Michael Olawale-Cole, had at a press conference in April suggested that the federal government must improve its tax collection by expanding the tax net to reduce dependence on oil revenues and exposure to global shocks like the war in Ukraine.

“We are likely to have a higher debt service-to-revenue ratio if revenue levels do not increase significantly,” Cole who described Nigeria’s debt-to-revenue ratio as worrisome, had said.
But the DMO while responding to LCCI in a statement said that Nigeria can lower its debt service-to-revenue ratio if it generates higher revenue  like Ghana, Kenya, and Angola.

The statement read in part, “The attention of the Debt Management Office is drawn to a recent report by the Lagos Chamber of Commerce and Industry, which stated that ‘staying within the current Debt-to-GDP threshold is an unreliable means of calibrating Nigeria’s current debt burden’. According to the Chamber, ‘the government must review its borrowing parameters on the basis of the country’s Debt-to-Revenue Ratio, which currently calls for concerns’.

“The Federal Government of Nigeria is aware of the country’s relatively high debt service-to-revenue ratio and has published the figures over the years, as well as included them in public presentations.

It added, “The primary reason for the high debt service-to-revenue ratio is because Nigeria’s revenue base is low. Furthermore, the Government is largely dependent on the sale of crude oil, as a major revenue source. If Nigeria, with a revenue-to-GDP ratio of nine per cent, generated revenues close to countries such as Kenya, Ghana and Angola with revenue-to-GDP ratios of 16.6 per cent, 12.5 per cent and 20.9 per cent respectively, then, its debt service-to-revenue would be lower.”

According to the DMO, although Ghana, Kenya and Angola have a higher revenue-to-GDP ratio, the countries, however, have higher public debt-to-GDP, unlike Nigeria.

“This position is buttressed by the fact that the highlighted countries have higher public debt-to-GDP ratios (Kenya: 67.6 per cent, Ghana: 78.9 per cent and Angola: 136.5 per cent) compared to Nigeria (22.80 per cent) yet record relatively lower debt service to revenue ratios due to their higher revenue-to-GDP ratios,” the DMO said in the statement.

A breakdown of the debt statistics as at December 31, 2020, showed that Nigeria owes International Development Association (IDA)  $11.12 billion; Eurobonds ($10. 8 billion); IMF ($3.53 billion) and Exim Bank of China ($3.26 billion), among others.

The debt stock includes new borrowings by the federal government and sub-nationals. The borrowed funds are helping in financing the budget deficit, capital projects and support economic recovery, according to authorities.
Although Nigeria’s current debt to GDP 22.47 per cent is relatively low, giving it room to borrow, its inability to generate adequate revenue has worsened its debt problem.

The debt to GDP ratio stood at 22.47 per cent compared to 21.61 per cent in 2020. At this level, the ratio is within Nigeria’s self-imposed limit of 40 per cent, the World Bank/IMF’s recommended limit of 55 per cent for countries within Nigeria’s peer group, and 70 per cent for ECOWAS countries.

Nigeria’s revenue to GDP ratio has remained low at nine per cent compared to countries, such as Ghana at 12.5 per cent; Kenya at 16.6 per cent; Angola at 20.9 per cent; and South Africa at 25.2 per cent.

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