HISTORY MAY REPEAT ITSELF AS NIGERIA RISKS ANOTHER DEBT TRAP
In recent times, there have been national debates on similarities in the current borrowing behaviour of the Nigerian government and its rising debt profile with that experienced in the 70’s. This has thus spurred worries and fears in the minds of the average Nigerian, economists and analysts alike as it took the country almost three decades to escape that storm cloaked as Nigeria’s debt trap under the administration of former President Olusegun Obasanjo.
A repeat performance seems to be brewing as President Buhari recently sought the approval of the senate to obtain $4 Billion and €710 Million loans to address critical projects approved by the Federal Executive Council. This has again brought to the fore concerns over the country’s rising debt profile. Nigeria’s total public debt stock rose from N33.11 Trillion as of March 31, 2021 to N35.47 trillion as of June 30, 2021. This shows an increase of 7.13 percent within the 3-month period. As of May 2021, the debt service to revenue ratio was pegged at 98percent.
This surge in the nation’s debt burden with its impact on debt servicing cost is raising concerns on the country’s debt sustainability. A breakdown of the debt stock revealed that the debt from foreign sources increased to N13.7tn as of June from N12.5tn in March 2021. Similarly, local debts rose to N21.8tn as of June from N20.6tn in March 2021. Consequently, debt to GDP ratio rose to 21.9 percent in June 2021 from 21.1 percent in March. Though the ratio remains well below the revised DMO’s borrowing limit to GDP ratio of 40 percent (25 percent previously), the debt service to revenue ratio remains worrisome.
Pat Utomi, a professor of Political Economics stated, “Despite the country’s poor revenue-generating capacity, overheads and statutory spending have continued unabated, amid a growing infrastructure deficit.” Nigerians are increasingly worried about the government’s rising debt profile, anticipated to increase given the planned Eurobond offering. FGN bonds and NTBs together comprise 92% of the entire debt stock.
Ayo Teriba, CEO Economic Associates said “The goal must be the replacement of interest-paying commercial bonds with interest-free commercial bonds on a wholesale basis to drastically reduce or eliminate the N4.9 trillion annual average interest payments that is projected in the 2022-2024 MTEF. Rather than issue interest paying bonds to fund infrastructure, we should create special purpose vehicles for packaging infrastructure assets for interest-free financing through asset-linked non-convertible or convertible bonds.”
“With the current depreciation of the local currency, pressures from servicing the increased external borrowings will keep debt servicing costs elevated in the medium term. Also, the expected Eurobond issuances will further intensify pressure should actual revenue keep lagging expected performance,” Teriba stated.