By OKEY ONYENWEAKU
In the whole frenzy of focusing on the presently unflattering state of the Nigerian economy, not much attention is being paid to the fact that the broader world debt stock is surging beyond expectations and this is creating huge fears among discerning stakeholders.
Debt is a deferred payment, or series of payments that is owed in the future, which is what differentiates it from an immediate purchase. On its part then, sovereign debt is the amount of money that a country’s government has borrowed, and which is typically issued as bonds that are denominated in a reserve currency.
Underscoring the scary bends that may be lying ahead, the World Bank only recently cried out that sovereign debts were reaching unprecedented heights.
And for good measure, many countries are neck deep in debt even as the world is afraid of an imminent debt crisis.
In number terms, the world’s debt stock is presently estimated at nearly $250 trillion, representing about 318 percent of the world’s gross domestic product (GDP). Experts say the figure is three times what it was two decades ago.
Analysis reveals that the biggest borrowers are the U.S., China, the Eurozone and Japan, which have more than two-thirds of the world’s household debt, three-quarters of corporate debt and nearly 80% of government debt.
While the U.S. debt was $22 trillion as of February 11, 2019, most headlines have however continued to focus on how much the United States owes China, one of the largest foreign owners of its overall debt stock.
Japan follows with about 19 percent of the global debt.
On its part, China, which is yet one of the leading economies in the world today by growth numbers, owes about 8 percent of the world’s debt and the debt of China is put approximately at US$ 4.3 trillion. Of this tally, the component of U.S. debt to China was $1.13 trillion as of January 2019. And this represents 28% of the $3.97 trillion in Treasury bills, notes, and bonds held by foreign countries.
The rest of the $22 trillion national debt is owned by either the American people or by the U.S. government itself.
The alarming growth of debts is eliciting goose pimples from the World Bank/ IMF and other international stakeholders.
Industry observers have fingered two of the largest contributors to the rise in debt as being from emerging market corporate entities and developed market governments.
Institute of International Finance’s Managing Director of Policy Initiatives Sonja Gibbs had accused governments in developed countries like the U.S., Japan and Europe, of having done very little to bring down debt in recent years despite low borrowing costs and the recent pickup in growth, which should have encouraged them to rein in budget deficits,’’
Similarly, the IMF has raised the alarm over the ballooning debt situation in the world, warning that it could cause another financial crisis if strategic breaks are not applied
In its own summation, the European Network on Debt and Development said in its new World Economic Outlook report released on the sidelines of the World Bank/ IMF Spring Meetings indicated that the world economic situation was deteriorating. Many poor countries have already been struck by the debt crises.
Notably, high debt levels may have become a key constraint for spending on infrastructure projects and the public good in poor countries. Every euro that goes to creditors is a euro that does not go to poverty eradication and sustainable development,’ observes Bodo Ellmers, Head of Policy at Eurodad.
He explained that the World Bank/ IMF Spring Meetings offer crucial opportunities to make decisions and to take the necessary steps to avoid a new debt crisis. ‘We need better institutions to solve debt crises in a fair, speedy and sustainable manner,’’ he stated.
Similarly, Tobias Adrian, Financial Counsellor and Director, Monetary and Capital Markets Department at the International Monetary Fund, IMF argued that increased corporate debt and financial risk taking was causing vulnerabilities in economies. He stated this much in his on elucidation on the report:
‘’The report provides an in-depth analysis of a number of specific vulnerabilities. In advanced economies, corporate debt and financial risk taking have increased. The creditworthiness of borrowers has deteriorated. So-called leveraged loans to highly indebted borrowers continue to be of particular concern. In the euro area, fiscal challenges remain in countries that have worries about the Sovereign financial sector nexus. If sovereign yields were to rise sharply banks with large holdings of debts could face significant losses’’, he said.
Research shows that public debt ratio’s to GDP are highest in the developed economies while the highest debt service ratios are found in low income countries.
For instance, Japans National debt to GDP ratio stood at 234.18 per cent, Greece 181.78 per cent, USA 109.45 per cent, Singapore 108 per cent, France 96.20 per cent, Belgium 99.08 per cent and Spain 95.12 per cent.
IMF has noted that whereas high debt to GDP was dangerous, but more dangerous according to them is high debt to savings.
Industry researchers believe that most African or low- income countries belong to this category.
Experts say a debt-to-income, or DTI, ratio is derived by dividing your monthly debt payments by your monthly gross income. The ratio is expressed as a percentage, and lenders use it to determine how well you manage monthly debts — and if you can afford to repay a loan. This is where many analysts believe that most low-income regions and countries – in which Africa and Nigeria belong – have challenges.
Looking critically, at economies and government finance, a country’s debt service ratio is the ratio of its debt service payments (principal + interest) to its export earnings.
There is a consensus that a country’s international finances are healthier when this ratio is low. For most countries the ratio is between 0 and 20%.
In African what has increased debt ratios are drop in exports, lower prices of commodities (which are the main exports of African countries), higher borrowing, higher interest rates, increasing cost of debt repayments and devaluation, and increasing cost of external repayments.
Nigeria may be one of the worst in the area of debt over -hang as its national debt stock escalated in 2018 to N24.387 trillion ($79. 437 billion), about N2.7 trillion or 9.1 per cent higher than the N21.725 trillion recorded at end of 2017.
Shedding more light on the situation, Nigeria’s Debt Management Office revealed that the huge addition was recorded in the fourth quarter of 2018 which came with a N1.96 trillion or 8.03 per cent increase as against the N22.428 trillion recorded at the end of September 2018.
While the Senior Resident Representative and Mission Chief for Nigeria, African Department of the multilateral agency, Amine Mati, put Nigeria’s growth rate for 2018 at 1.9 per cent, its debt to Gross Domestic Product remained low at between 20 and 25 per cent. However, the country spent a high proportion of its revenue on debt servicing as a result of low revenue generation. But the snag is that like many other low income nations, the Breton Woods financial institution says Nigeria spends more than 50 per cent of its revenues on servicing debts, a situation that does not give room for other necessary expenses. And that is where some more robust initiatives would now need to be put on the table.