The International Monetary Fund (IMF) has warned that Nigeria’s decade-long rise in public debt could create both financial as well as revenue squeeze for the economy in the medium term.
The Fund’s mission chief for Nigeria, Jesmin Rahman in the IMF/Nigeria 2021 article IV consultation staff press conference stated that though the country’s current debt dynamics at the moment seem favourable as it still resides within the 30 percent threshold, its trajectory, however, would become a major economic concern in the medium term.
“Public debt threshold for emerging markets stand at 10 percent; however, Nigeria currently spends above 80 percent to service its debt. Recent estimates indicate that public debt is to increase from 36 percent to 40 percent in the medium term. Should this happen, it is going to become a major cause for concern for the Nigerian government,” she said.
Debt servicing for Nigeria since the oil decline in 2020 has been dependent on CBN overdraft and Eurobond subscriptions. Thomas Alun, a senior economist at the IMF stated that while Nigeria’s Eurobonds are oversubscribed, dependence on Eurobonds however, is quite risky as economic volatility could translate to both financial as well as revenue squeeze for the Nigerian economy which in turn further escalates the country’s rising debt.
He further stated that Nigeria’s debt sustainability or further crisis is dependent on a number of economic factors. “Nigeria’s debt trend is not looking favorable on the debt portfolio end but the estimates are dependent on various economic factors. Whether debt becomes stressful or not is dependent on a number of factors like growth, interest rate, oil prices, financing situation in the country amongst others,” Alun said.
Nigeria’s debt service is currently suffocating federal spending and by extension is suffocating the general economy and the living conditions of Nigerian households. Accompanying this grim reality is the government’s heavy reliance on oil revenues which has been extremely anaemic in the last couple of years.
Dwindling oil revenues which emanated in 2020 as a result of the slump in oil prices in the international market due to the covid-19 pandemic, necessitated the Nigerian government to rely heavily on borrowing (both external and domestic), to finance its projects and try to close up budget deficits. This notwithstanding has not convinced the Nigerian populace as well as foreign investors’ as to why the country’s borrowing has been significantly rising since 2016 with no evidence (infrastructure or otherwise) to justify it.
Dating back to 2015, data culled from the Debt Management Office (DMO) revealed that the nation’s external debt stood at $10.31bn and total public debt stood at $63.806bn or N12.1trn within the review period. Six years down the line (2021), the figure had almost tripled to $37.95bn for foreign debt and $92.626bn or N38.0trn for total public debt as of September 2021, representing a 268 percent increase in external debts and a 214.0 per cent increase in total debts.
In a failed attempt to sustain these debts, the Federal Government spends trillions of naira yearly servicing more debts. Since 2017, this administration has spent a total of N15.375trn on debt servicing, excluding N296bn and N110bn allocated for sinking funds in 2019 and 2020. Ayodeji Ebo, head of Retail Investment at Chapel Hill Denham told Business Day that when a budget crisis emanates, the capital expenditure which directly impacts the general economy is always at the receiving end.