Nigeria’s debt to Gross Domestic Product (GDP) ratio has hit 17 per cent, Managing Director, Financial Derivatives Company (FDC) Limited, Bismark Rewane, has said.
The FDC Economic report for September, said the total amount of government debt outstanding in Nigeria is N6.89 trillion, representing a mere 17.9 per cent of GDP.
He explained that although Nigeria‘s debt is not yet at the 30 per cent debt to GDP threshold set by the government, two alarming trends are beginning to develop. The first is the rate at which Nigeria‘s debt level is currently rising and the second, is the rising cost of government’s borrowing.
Currently, the cost of government borrowing is above 12 per cent on three,, five and 10 years bonds, and N559.6 billion has been budgeted for debt servicing this year. While Nigeria is still a fair distance from reaching the government‘s 30 per cent threshold, he insisted that it is important for policy-makers to recognize these trends and learn from our past mistakes and the mistakes of European countries.
He said the percentage does not include Asset Management Corporation of Nigeria (AMCON) and sub-national bonds. He said that if these are to be added, Nigeria‘s debt-to-GDP percentage is in the mid 30s. “Nonetheless, currently, Nigeria’s debt-to-GDP ratio of 17.9 per cent is comparatively low, relative to the debt to GDP ratio of Ghana (41.2 per cent) or South Africa (38.8 per cent),” he said.
Rewane said Nigeria’s debt to GDP financial crisis has led to a sharp increase in global government debt as governments scramble to save their financial systems from collapse. According to International Monetary Fund (IMF) figures, the aggregate net government debt in the world rose to $54 trillion in 2011 from $22 trillion in 2007, an increase of 145 per cent in four years.
However, to curb the increasing debt, governments have implemented austerity measures and increased taxes. In reaction to such policies we have seen riots across Europe, as citizens pro-tested in response to the effects of these policies, which included increased government cuts and rising unemployment.
“What has become clear from the euro-zone sovereign debt crisis is that rising government debt can no longer be ignored due to its direct impact on economies and citizens. In the last three years, two important lessons have been learnt from the European sovereign debt crisis: When government debt levels are rising it is difficult to anticipate when the threshold will be crossed, leading to the debt level spiraling out of control; When investors lose confidence in a government’s ability to afford its debt, problems can compound and potentially lead to a funding crisis,” he said.
According to him, the two main factors that determine the interest burden on government debts are investor demand for debt and the amount of outstanding debt. Germany and the United States, he said, are selling 10 years of government debt at historically low yields of 1.16 per cent and 1.42 per cent respectively.
a sign both of investors’ confidence in those governments’ ability to repay the debt, as well as being a product of the artificially low interest rate set by these governments. Consequently, these countries are perceived as safe havens by investors.
He said that while the debt in Nigeria may be lower, there is a key difference with other advanced economies. “Instead of using debt for investment in government capital expenditure projects or fundamental transformations to essential services, the majority of the Nigeria‘s debt has been used to plug holes in its budget, while the rest has been spent on recur-rent expenditure.,” he said.
Rewane argued that the 2012 budget deficit stands at N1.11 trillion, the majority of which will be financed through debt. The deficit is 2.85 per cent of GDP, in line with the provisions of the Fiscal Responsibility Act 2007, which pegs it at three per cent of GDP.
He insisted that Nigeria‘s increasing debt-to-GDP ratio has not been matched by investments in infrastructure projects, or by increased spending on healthcare or education. “If the government deficit is spent on infrastructure, basic research, public health and/or education it can increase its potential output in the long run. There are also issues surrounding the crowding out effect of the private sector,” he said.
