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Nigeria’s lingering debt burden may worsen if the incoming administration does not reduce the amount used in serving it. A recent World Bank’s report revealed that the federal government spent 96.3 per cent of its revenue on servicing debts in 2022. At present, Nigeria’s indebtedness to the World Bank stands at N6trillion. This represents an increase of about 121 per cent since the inception of President Muhammadu Buhari’s administration in 2015.
At the same time, Nigeria’s debt to China increased by 209 per cent over the last eight years. As at December 2022, it stood at $4.29billion. Nigeria’s public debt stock has reached 38 per cent of the Gross Domestic Product (GDP), while the debt service to revenue ratio had increased from 83.2 per cent in 2021 to 96.3 per cent in 2022. This represents about 12.9 per cent rise.
The World Bank’s report is contained in its Macro Poverty Outlook for Nigeria for April, 2023. A breakdown of the report shows that the cost of petrol subsidy increased from 0.7 per cent to 2.3 per cent of the Gross Domestic Product (GDP), while low non-oil revenues and high interest payments worsened Nigeria’s fiscal situation.
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 per cent. The bank has predicted that Nigeria’s fiscal and debt pressures will continue to rise if fuel subsidy is not phased out in June 2023 as proposed in the 2023 Appropriation Act. To check the debt stock from spiraling out of control, the bank enjoins the incoming administration to strengthen the economy by restoring macroeconomic stability; reducing government’s expenditure and leakages through pragmatic budgetary planning that will increase non-oil revenues.
It also urges the new government to tighten monetary policies, reduce inflation and unify the multiple foreign exchange (FX) windows and adopt a single, market responsive exchange rate. Though the World Bank’s report paints a grim picture of Nigeria’s economy, it is a fair assessment of our present macroeconomic challenges that require urgent and comprehensive reforms to address.
Undoubtedly, Nigeria’s debt has increased significantly in recent years, resulting in humongous amount being spent on debt servicing because of drastic shortfall in revenue generation. For instance, Nigeria’s GDP declined from 3.6 per cent in 2021 to 3.3 per cent in 2022. This was due to challenges in the manufacturing and construction sectors. The oil sector had witnessed steep decline of 19.2 per cent since 2020. According to statistics, the decline in oil production stems largely from technical and security challenges in the oil-producing Niger Delta region, aging infrastructure and inadequate investments in the sector, the delay by the NNPCL in paying for government’s share of costs in joint venture operations. The steady increase in inflation rate resulting from global commodity prices, the sharp depreciation of the naira, the exchange rate disparity and the fiscal deficit have impacted negatively on government’s total revenues.
To finance the growing deficit, the government resorted to borrow heavily from the CBN through Ways and Means to the tune of about N23trillion. This has, in turn, increased interest rate and costs, thereby crowding out private sector credit and fuelling inflation to its rate of 22.4 per cent, the highest in almost two decades.
Due to the underperformance of the economy, there have been low private investment, low and inefficient public spending, leading to low productivity and deceleration of growth and development across key sectors of the economy. Going forward, the incoming 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.
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. It will also provide flexible and tailored approach to policy support, with the goal of helping the country develop and implement sound economic policies and promote sustainable growth. Beyond these options, there is need for cautious borrowing and prudent management of the funds. To reduce the amount spent on debt servicing, there should be effective and efficient budgetary control, drastic reduction of cost of governance and entrenchment of accountability and transparency.
The economy needs a rescue plan and huge investments across all levels – micro, small and medium and large-scale enterprises, aggressive diversification with target on boosting exports. Any borrowing must be in line with borrowing guidelines as stipulated in the Debt Management Office Establishment Act (as amended) and the Fiscal Responsibility Act.
