Former Nigerian leader, Chief Olusegun Obasanjo, recently described the nation’s escalating debt profile as a ‘significant burden on both present and future generations.’ Obasanjo’s concern reflects similar worries by many concerned Nigerians on the imminent debt overhang. For instance, Nigeria’s debt surged by N12.6trillion in the last three months, reaching N134.3 trillion ($91.3billion) by the end of second quarter of 2024. This marks a 10.35 per cent increase from the N121.7trillion recorded in the first quarter of the year.
It was Obasanjo administration that secured debt forgiveness for Nigeria in 2006 from the Paris Club of creditors. But the binge borrowing by the present administration may see Nigeria again treading that path if nothing is done to curb it. The country is already on a fiscal edge as statistics show that the federal government has piled up N4trillion unfunded deficit in twelve months. According to data from global financial institutions, Nigeria is gradually reaching its limits on borrowing. Its indebtedness to China has reached all-time high of 209 per cent in the last 8 years.
With a debt overhang of $17.1billion to the World Bank’s International Development Association (IDA), Nigeria has officially become the third largest debtor to the World Bank Group. Data from the Debt Management Office showed that Nigeria serviced its external debt to the International Monetary Fund (IMF) with about $1.22billion during the past nine months (January-September). The payments were made as part of principal repayments for three consecutive quarters, from Q4, 2023 to Q2, 2024.
By so doing, Nigeria’s debt servicing to the IMF has been reduced to 64.42 per cent within the last one year. In 2020, IMF granted Nigeria a loan of $3.4billion emergency financial assistance. The loan was approved under the Rapid Financial Instrument by the Executive Board of the bank to address challenges arising from the economic impact of COVID-19 in the country. Out of the N47.9trillion budget proposal for 2025, the bulk of it will be sourced from domestic and external markets. Latest figures from the DMO showed that the federal government has exceeded its domestic borrowing for 2024 by N4trillion. This represents 67 per cent above the budgeted amount. Details of the domestic borrowing activities of the government from January to November 2024 showed an excess borrowing of N2.93trillion or 49 per cent above the target for November.
A breakdown of the figures shows that the government borrowed N8.93trillion from domestic investors for the months under review as against N56trillion planned for the whole year. Experts have warned that if the trend is not checked, the federal government may end up borrowing more than N10 trillion by end of the year. This is because government intends to borrow more to finance the deficit arising from the domestic and external sources that amount to a total of N9.22trillion. This will be 18 per cent higher than the N7.8trillion for 2024.
On the average, Nigeria spends about 95 per cent of its revenue on debt repayment annually. This exceeds both recurrent and capital expenditures for the outgoing fiscal year. Moody’s recently warned that Nigeria’s debt interest payment could consume more than 36 per cent of the federal government’s revenue next year. Nigeria’s ballooning debt profile is worrisome. Borrowing per se is not the problem, as every country borrows either from domestic or external market or both to finance key projects. However, Nigeria has borrowed more for consumption than for production.
Moreover, Nigeria’s increasing debt has not translated into meaningful economic growth and development. This means that it risks prolonged economic stagnation and heightened fiscal vulnerability without effective strategies to bolster revenue, reduce borrowing costs, and optimize debt management. In the case of default, Nigeria could be in a debt trap like Zambia and Ethiopia. Nigeria should urgently restructure its domestic and external debts. This must run side by side with meaningful economic reforms.
Meanwhile, Nigeria’s debt-to-GDP ratio increased from 25 per cent to 40 per cent since 2021, and is projected to reach 46.8 per cent in 2025. Arising from that, the IMF has downgraded Nigeria’s fiscal balance to GDP ratio to -4.6 per cent in 2024 from -4.2 per cent. It attributed this to accumulated loans on concessional terms, high inflation resulting in unfavorable interest growth differentials that are suffocating businesses. Let the Tinubu administration review its borrowing spree and do the needful. Also, the government should look at the proper implementation and effective monitoring of the budget in all sectors of the economy.
To reduce the amount spent on debt servicing, there should be effective and efficient budgetary control and drastic reduction in cost of governance. The economy needs a new direction, a detailed rescue plan and huge investments across all the sectors. Emphasis should be placed on diversification, with target on boosting non-oil exports. Henceforth, borrowing must be done with utmost caution. It must focus on economic growth and job creation.