A new report that Nigeria uses a larger percentage of its revenue to service debt is disconcerting. According to the Debt Management Office (DMO), of the N4.26trillion total revenue set aside for financing the 2022 budget in the first three quarters of last year, N4.23trillion was spent on debt servicing. This figure is contained in the budget performance report prepared by the Office of the Accountant General of the Federation and the Budget Office. In real terms, this translates to revenue ratio of 99.2 per cent raised for debt services, the highest Nigeria has recorded.
The figure is also 10 percentage points higher than the estimated 80.6 per cent captured in the 2023 budget document. The federal government has spent N5.24trillion to service its debt obligations to different domestic and external creditors. Nigeria’s indebtedness to the World Bank Group has exceeded N7trillion. This represents an increase of about 125 per cent in the last eight years. Also, Nigeria’s debt to China has increased by 209 per cent over the last eight years. As of December 2022, it stood at $4.29billion.
A recent World Bank report shows that the federal government spent 96.3 per cent of revenue generation on servicing debts in 2022. This has kept Nigeria’s public debt stock at 38 per cent of the Gross Domestic Product (GDP) and pushed the debt service to revenue ratio from 83.2 per cent in 2021 to 96.3 per cent in 2022. This represents about 12.9 per cent rise. The DMO says N15.5trillion is needed to achieve sustainable debt.
The 2023 budget has a deficit of N11.34trillion. A total public debt-to-GDP ratio was projected at 37.1 per cent. This indicates a borrowing space of 2.9 per cent, equivalent to N14.66trillion, or a debt service-to-revenue ratio of 73.5 per cent for this year. This means that the federal government requires a new borrowing in excess of N9trillion in 2023 to keep up with the financing of N11trillion deficit in the 2023 budget of N21trillion.
With a debt stock to GDP ratio below 25 per cent threshold, the economy is on the edge. Nigeria’s debt service to revenue ratio peaked at 100 per cent last year. As of March 31, 2023, Nigeria’s debt stood at N49.85 trillion. This excludes N22.7trillion from Ways and Means Advances from the Central Bank of Nigeria (CBN). The national debt could reach N81trillion by year end. According to the World Bank, the fiscal deficit of Nigeria was estimated at five per cent of GDP in 2022. This breaches the stipulated limit for the federal fiscal deficit of three percent. The global bank has predicted that Nigeria’s fiscal and debt pressures will continue to rise. We urge the Tinubu administration to strengthen the economy by restoring macroeconomic stability. Let it reduce inflation, which has hit a new high of 22.7 per cent. The unification of the exchange rate markets has not yielded the expected results as the naira continues to fall against major foreign currencies.
We believe that the government can beat the debt trap and reduce the amount spent on debt servicing by using three main financial options. These include approaching the IMF for a Policy Support Instrument (PSI), Debt Conversion, and Debt restructuring. When effectively implemented, they can help the country solve the lingering debt burden. It is imperative that the government should take a critical look at these options in the best interest of the economy.
For instance, the PSI debt option will allow the IMF to provide policy advice and support Nigeria with the necessary expertise and guidance on economic policies. Beyond these options, there is need for cautious borrowing and prudent management of the loans from domestic and international markets. To reduce the amount spent on debt servicing, there should be effective and efficient budgetary control, drastic reduction in the cost of governance.
The economy needs a new direction, a rescue plan and huge investments at all levels. Any borrowing must be done with utmost care and in line with the borrowing guidelines as stipulated in the Debt Management Office Establishment Act (as amended) and the Fiscal Responsibility Act.