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Following the disclosure that the Federal Government has recorded a budget deficit of N8.74trillion at the end of last year, the Senate President, Ahmad Lawan, raised a fresh alarm over the poor state of the economy. Lawan expressed the concern at the 40th Anniversary Lecture of the Chartered Institute of Taxation of Nigeria (CITN) in Abuja, recently. His red flag on the economy is one of the numerous voices that have expressed deep reservations on the amount spent on debt servicing by the government.
About three months ago, the Minister of Finance, Budget and National Planning, Zainab Ahmed, while giving a breakdown of the 2022 budget, noted that government had recorded a budget deficit of N7.052trillion as at November, 2021. This translates to an increase in deficit of N1.7trillion between November and December, 2021. The government has projected N6.39trillion deficit in the nation’s Gross Domestic Product (GDP) in 2022. This means that the population is growing much faster than economic growth, and much more than revenue generation. The demographic indicators pose real challenge to providing quality social service delivery to the people.
The alarm raised by the Senate President and others is not surprising. However, what is puzzling is the refusal of the government to heed the clarion calls to be cautious on borrowings. Going by the present debt stock and the amount set aside for debt servicing, for every N1 borrowed, 80kobo is spent on servicing the debt. In real terms, this implies that loans taken by government had been grossly mismanaged or not wisely invested. Yet, the debt servicing continues to rise. For instance, in 2019 alone, debt service gulped N2.5trillion. By end of 2021, it rose to N4.2trillion, representing almost 100 per cent in two years.
Though there is nothing wrong with borrowing, doing so for consumption rather than investment in critical areas that can repay the loans poses a threat to the nation’s economic survival. The World Bank in its November 2021 “Nigeria Development Update,” raised the alarm that Nigeria’s debt was vulnerable. It almost said the same thing about Nigeria’s economy. This is why the government should check the rising debt as well as the increasing cost of debt servicing. If the government does not place a moratorium on borrowing, the nation’s debt stock could reach as high as 40 per cent of the GDP in the next three years, according to the latest World Bank forecast. That will be extremely dangerous. The poor state of the economy has disrupted public investment and spending. At the same time, Foreign Direct Investment (FDI) has dropped significantly because of insecurity, which has also affected the Ease of Doing Business (EoDB) in the country.
The amount spent on debt servicing is crowding out other critical public investments that will impact positively on development and the welfare of the citizens. Interest costs have risen above two per cent of the GDP since 2018, reaching 2.4 per cent of the GDP in 2019. This has resulted in government resorting to overdrafts to meet cash shortfalls and other contractual obligations. At the end of 2020, overdraft financing was N13.1trilion or 8.5 per cent of the GDP. There is an ongoing effort by the Federal Government to negotiate loan terms with the CBN to convert the stock of overdraft financing into long-term debt instruments. The initiative will lower the cost of debt for the government and enhance fiscal sustainability over the medium long-term. This is only a relief measure. It does not put the economy on sustainable growth and recovery, as long as the government continues with its borrowing binge.
Recent figures from the Debt Management Office (DMO) showed that in the first nine months of last year, N2.48trillion was spent on debt servicing. Out of this amount, N612.72billion was spent on domestic debt servicing, and N410.83billion on external debt from January to March, 2021. From April to June, 2021, $299 million was spent on external debt servicing and N322.7billion on domestic debt servicing, while from July to September 2021, N808.49billion was spent on domestic debt and $520million on external debt.
With poor investments, low revenue, all of which threaten Nigeria’s economic growth, government must creatively do something to put the economy on the path of recovery and growth. To revamp the economy, the government should borrow less, drastically cut the cost of governance and truly diversify the economy.
