$2.8bn spent on debt servicing in 7months sparks concerns

By Chinwendu Obienyi

Nigeria’s escalating external debt obligations have ignited widespread concern as the nation spent an astounding $2.78 billion on foreign debt servicing in the first seven months of 2024. The substantial figure, accounting for 64% of the total $4.36 billion in international payments made by the Central Bank of Nigeria (CBN) on behalf of the government during this period, has raised alarm over the country’s financial sustainability.

The proportion of funds allocated to debt servicing has surged dramatically, climbing from 46% in the same period last year to 64% this year. This sharp increase reflects the growing financial pressure on Nigeria, driven by a combination of rising debt levels, higher interest rates on existing debt, and possibly more aggressive repayment schedules. The nation’s escalating debt burden suggests an urgent need for strategic financial intervention to prevent further economic deterioration.

January 2024 set a troubling precedent when debt servicing payments soared to $560.52 million—a staggering 399% increase from the previous year. This surge signaled the beginning of a year marked by financial strain, with May 2024 seeing the highest monthly debt servicing expenditure at $854.37 million. Although there were brief periods of relief, such as a slight dip in June, the overall trend has been one of increasing financial stress, with the burden of debt showing no signs of abating.

The global financial community, led by institutions like the World Bank, has taken notice of Nigeria’s precarious situation. The World Bank has consistently warned of the risks posed by rising debt levels in developing nations, particularly in the context of climbing interest rates. Nigeria’s growing debt burden places the country in a vulnerable position, with the specter of economic distress looming large.

The Federal Government has publicly acknowledged the severity of the situation, revealing that $1.12 billion was spent on foreign debt servicing in the first quarter of 2024 alone. This admission underscores the immense strain that external debt is placing on the nation’s finances, further fueling concerns about the country’s economic trajectory.

Indermit Gill, Chief Economist and Senior Vice President of the World Bank, has voiced grave concerns over Nigeria’s escalating debt. He cautioned that if these challenges remain unaddressed, the nation could be forced to make difficult decisions regarding resource allocation, potentially jeopardizing its economic stability. Gill emphasized that the combination of record-level debt and rising interest rates is creating a perilous situation for many developing nations, with Nigeria being particularly at risk.

Local financial experts have echoed these global concerns, urging immediate action. Johnson Chukwu, Chief Executive Officer of Cowry Asset Management Ltd, stressed the critical need for Nigeria to reassess its fiscal strategy. He suggested exploring options such as debt restructuring, enhancing revenue generation, or seeking international financial support to avoid exacerbating the already precarious situation. Chukwu warned that without economic growth outpacing population growth, poverty levels would rise, further eroding the standard of living.

Chukwu also pointed out the negative impact of the CBN’s lending to the government, which he argued is contributing to inflation and exerting pressure on the exchange rate. He emphasized that while inflation may have temporarily slowed, long-term economic stability is unattainable without a return to robust production levels.

Professor Olufemi Saibu, a Development Macroeconomics expert at the University of Lagos, also criticized the government’s over-reliance on borrowing. He argued that this dependency has made the government complacent in its efforts to generate revenue. Saibu called for a reduction in government spending and a shift in focus towards more productive sectors of the economy. He warned that the current approach of heavy infrastructure debt financing, combined with low local productivity, is unsustainable and urged the government to borrow less for consumption and focus more on productive investments.

Adding to these perspectives, Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, offered insights on alternative revenue sources during a recent forum. He emphasized that while the FG is working to improve fiscal governance and create a more conducive environment for business and investment, better management of government assets could also serve as a significant revenue stream. Oyedele highlighted the importance of recognizing Nigeria’s financial limitations, noting that the country’s entire budget, including supplementary allocations, is under $40 billion—far less than that of many other African nations. He argued that Nigeria’s path to prosperity lies in making strategic investments that will yield long-term benefits, rather than relying solely on taxation.

As Nigeria grapples with its mounting debt, the urgency for strategic fiscal reforms has never been greater. Without a comprehensive approach to managing its debt obligations, the country risks deeper financial instability, threatening its long-term economic growth and the well-being of its citizens. The time for decisive action is now, as Nigeria faces the daunting task of steering its economy away from the brink of crisis.