Concerns by a few discerning publics including the International Monetary Fund (IMF) that Nigeria expends over 50% of her revenue to service debts have further raised questions about the impropriety of the nation’s debt management processes. Ibrahim Apekhade Yusuf in this report takes a look at Nigeria’s debt stock, implication for the economy.
The received wisdom out there is that Nigeria’s debt stock is anything but pleasant. Of course, the reason for this is not far to seek, as many economic pundits who should know have raised red flags over the economic health of the country, debt-wise.
One of such complaints came from the International Monetary Fund (IMF) which had raised the alarm that Nigeria currently spends over 50% of its revenue to service debts.
According to the IMF, the situation is unhealthy because it does not give the country room to spend in other necessary areas.
Giving this damning verdict was the Senior Resident Representative and Mission Chief in Nigeria, African Department of the IMF, Amine Mati, who spoke at the public presentation of the Regional Economic Outlook for Sub-Saharan Africa – Capital Flows and the Future of Work in Abuja.
Mati, who put Nigeria’s growth rate for 2018 at 1.9 per cent, also said that although Nigeria’s debt to Gross Domestic Product remained low at between 20 and 25 per cent, the country spent a high proportion of its revenue on debt servicing as a result of low revenue generation.
According to him, for Nigeria, the debt servicing to revenue ratio was more than 50 per cent while for sub-Saharan Africa, the rate was about 10 per cent; a figure he said was too high and akin of what the region went through in the period following debt relief at the beginning of the 21st century.
Mati said: “Security issues are exacting a significant human toll in a number of countries. Debt to GDP ratio is increasing in the past five years. Public debt is diverting more resources towards debt servicing.
“The interest rate has gone up to where they used to be around the year 2000 before the debt relief. The adjustment has relied on spending compression rather than revenues mobilisation. Meeting the Sustainable Development Goals will require stronger growth and more financing.”
Also speaking on the sidelines of the World Bank Group Spring Meetings in Washington DC, few months ago, Mrs Catherine Pattillo, Assistant Director, Fiscal Affairs Department, IMF, described the country’s debt to revenue ratio, which she put at 63 percent, as “extremely high.”
She, therefore, recommended that in line with the IMF staff report on Nigeria, the Fund would want to see increases in tax rates and collection capacity to help reduce government’s budget deficit while financing key development projects.
More worries over Nigeria’s unhealthy debts
The IMF is not the only one that has raised red flags over the nation’s debt situation. Earlier in the year, one of the leading global rating agencies, Standard and Poor’s (S&P) cautioned Nigeria about its rising debt profile, which has led to a rise in its debt service cost.
The Deputy Secretary-General of the United Nations (UN), Amina Mohammed, has equally expressed worries over Nigeria’s debt profile.
Mrs Mohammed, a former Minister of Environment in President Muhammadu Buhari’s government, expressed her concerns while speaking at the International Monetary Fund (IMF) and the UN Working Together Conversation programme.
Mrs Mohammed explained that although a former minister of finance, Ngozi Okonjo-Iweala, was very influential in the debt relief Nigeria secured in 2005, the nation has since returned to the path of indebtedness.
The UN chief, in the conversation with Christine Lagarde, the Managing Director of the IMF, said Africa’s conception of development is worrying, and better conversations need to be held on how to achieve growth and meet certain development goals, while ensuring that the continent’s debt profile is put in check.
“I think we really need to sit down and have a better conversation about all the tasks of a growing economy that need to be inclusive, it needs to succeed, because stability is needed more than ever today,” she said.
In the view of FSDH Research, the federal government needs to urgently implement policies that will grow and diversify the revenue base of the country to avoid imminent debt crisis.
It stated this in its latest monthly economic and financial markets outlook it titled ‘Interest rate hike in US, hold in Nigeria: What Next?’
The FSDH said its analysis showed that the growth in Nigeria’s debt was higher than the growth in revenue.
“In addition, Nigeria has the lowest government revenue to Gross Domestic Product ratio at six per cent among some selected countries. Nigeria’s over-dependency on crude oil revenue, combined with volatility in both the price and production of crude oil is the major reason for sluggish growth in government revenue.
“Our analysis of the ratio of the interest payment on domestic debt relative to the FGN allocation from the Federal Account Allocation Committee shows that the FGN is spending too much of its revenue to pay interest on loans. This leaves the government with little resources to spend on critical sectors of the economy that could support strong growth and maintain a healthy economy to generate revenue.”
Although the government had been able to meet its debt obligations (interest and principal payments) so far, the report noted that if the current situation was not addressed, the interest rate on government loans might increase because of the perceived elevated risk.
Snapshot of Nigeria’s debt profile
Nigeria’s total domestic and foreign debt stocks as at June 30 stood at about $15.1 billion and N14.1 trillion respectively, the National Bureau of Statistics has said.
A review of the total foreign debt profile of the Federal and the 36 states governments and the FCT also shows a continuous rise since the coming of the present administration, from $10.718 billion in 2015, to $11.406 billion in 2016 and $15.047 billion in 2017.
Out of the current total figure of $15.047 billion, the Federal Government accounts for $11.106 billion, or about 74 per cent, while the 36 states of the federation and the Federal Capital Territory, FCT, Abuja owe about $3.94 billion, or 26 per cent.
The Federal and State government shares of the debt stock grew from $7.349 billion and $3.369 billion in 2015, to $7.84 billion and $3.568 billion in 2016, and $3.94 billion and $11.106 billion in 2017 respectively.
Details of the debt figures show that the domestic debts figures of the 36 states of the federation and the FCT have continued to grow since 2015 under the present administration.
Government accounts for about N11.058 trillion, or 78.66 per cent, against about N2.959 trillion, or 21.34 per cent by all the states and the FCT.
Further breakdown of the Federal Government domestic debt stock by instruments shows that about N7.56 trillion, or 68.41 per cent were in bonds; N3.28 trillion, or 29.64 per cent in treasury bills, while N215.99 million, or 1.95 per cent went into treasury bonds.
A horse of recall
In October 2005, during the administration of former president Olusegun Obasanjo, Nigeria and the Paris Club announced a final agreement for debt relief worth $18 billion and an overall reduction of Nigeria’s debt stock by $30 billion. The relief was championed by Mrs Okonjo-Iweala, then finance minister.
DMO’s defence
However, the Director General of the Debt Management Office, Patience Oniha has defended the action of the Federal Government in borrowing, insisting that it was important for the government to borrow especially given the nation’s low revenue generating capacity.
According to her, without sufficient revenue and with the recession that the country found itself between 2016 and 2017, the government had no option but to borrow and spend the country out of recession.
Oniha said: “We are borrowing to be able to increase forex availability. The government needed to borrow in order to spend the country out of recession.”
Oniha also disclosed that the government had proposed to borrow N1.5tn in the 2019 fiscal year, adding that borrowing had reduced as the nation was now out of recession, adding that in 2016, the federal government borrowed N2.5tn which was approved by the National Assembly while it proposed to borrow N1.64tn in the current financial year.
She further revealed that in 2019, the proposed debt of N1.5tn had gone further down, adding that the government had taken steps to diversify the economy and increase tax collection which she said was lower than in most countries of the Economic Community of West African States.
Experts’ red alert
On the growing concerns over debt sustainability Uchenna Uwaleke, a Professor of Finance & Capital market in a piece titled, ‘The real issue in Nigeria’s debt story,’ said, “Concerns about the country’s growing public debt appear to be mounting following the recent letter by the President to the Senate requesting the approval of external loans to the tune of $5.5bn for the purpose of implementing the external borrowing approved in the 2017 Appropriation Act (about N1.07tn out of the N2.32tn deficit) as well as “re-financing maturing domestic debts through the issuance of $3bn Eurobond in the International Capital Market or through a loan syndication.”
Way forward
It is instructive to note that experts have argued that critical steps are required to deepen Nigeria’s debt market. This was the focus of discourse in Lagos as the Annual Bonds, Loans and Sukuk Nigeria Conference was held in the Nigerian commercial capital recently.
The conference which brought together over 300 participants comprising government officials, corporate bodies, banks, fund managers, investors and advisors, is a premier event connecting fund raisers with lenders and investors active within the Nigerian capital market space.
The event facilitated by Stanbic IBTC also featured over 30 key industry speakers who shared views on local asset management, developments in the pensions and alternative asset management space, and issues affecting institutional investors; as well as providing insights on the capital market strategies of leading sovereign, corporate and project companies.
Chairman of the event and Chief Executive, Stanbic IBTC Bank PLC, Demola Sogunle, in his welcome address, said “The bond market plays a central role in the deepening of financial markets not only for the diversity of products it offers the market but essentially its role in improving diversification of funding sources and increasing access to credit markets. It is therefore the right time to ensure that proper structures are in place to ensure the development of a deep and expansive bonds, loans and derivatives market in Nigeria.”
