RISING DEBT, WEAK SPENDING, LOW TAX PUT NIGERIA IN TRILEMMA

 In Investor News

The debt-GDP ratio compares Nigeria’s debt to its GDP, while the debt-servicing ratio compares Nigeria’s debt interest payments to how much the government earns in revenues. Nigeria’s rising debt combined with its weak spending and the difficulty in raising extra tax revenues means it faces a fiscal policy trilemma. Africa’s biggest economy’s debt to GDP ratio at 33 percent is lower when compared to emerging peers like Egypt (90.2 percent), South Africa (80.3 percent), Ghana (78 percent) and Ethiopia (59 percent). However, this only masks deeper problems like its debt-servicing ratio of 87 percent.

According to the latest National Development Update by the World Bank, the cost of debt servicing is a concern as it is potentially crowding out public investment and critical service delivery spending. The bank also noted that while Nigeria’s debt to GDP is sustainable, it is rising quickly and without a policy change is expected to reach 40 percent of GDP by 2025. The debt-GDP ratio compares Nigeria’s debt to its GDP, while the debt-servicing ratio compares Nigeria’s debt interest payments to how much the government earns in revenues. While Nigeria’s public debt continues to surge, spending needs are also growing.

With 14 million out-of-school children, Nigeria’s deteriorating educational system needs more financing. The country also needs to spend more on health, defence and infrastructures. With the huge spending needs, raising additional revenue through taxes or other sources has also been challenging for the government. The International Monetary Fund (IMF) recently said Nigeria would need to increase its value added tax (VAT) to at least 10 percent by 2022 and 15 percent by 2025 to boost revenues.

The Nigerian government in a bid to boost tax revenue had raised the VAT from five percent to 7.5 percent in the first quarter of 2020, still one of the lowest in the world, but experts say that Nigeria should not raise the tax rate.

“While tax rates are relatively low in Nigeria, it is simply not an excuse to keep increasing taxes. Take the case of Norway for example. Its tax-to-GDP ratio is 39 percent. Singapore’s tax-to-GDP ratio is 13.2 percent. And Nigeria’s tax-to-GDP is 6.1 percent. It is easy to make the comparison and say Nigeria needs to raise its taxes to similar levels as in Norway or Singapore,” Akinwumi Adesina, president of African Development Bank said recently.

“But also consider the following: In Norway, education is free through university. In Singapore, a country that had only one-third of Nigeria’s per capita income at its independence in 1965, today has 100 percent access to electricity and 100 percent access to water,” Adesina said. “People sink their private boreholes to get water, generate their own electricity oftentimes with diesel, build roads to their neighbourhoods and provide security services themselves,” he said.

The economy has failed to grow fast enough to accommodate its bulging population since 2015, according to data by the National Bureau of Statistics (NBS), an indication that Nigerians are poorer. To address the trilemma, the IMF has said external assistance can help ease the trade-offs.

In August 2021, the IMF implemented the largest Special drawing rights (SDRs) allocation in history at $650 billion, of which Nigeria will get $3.35 billion. This will help boost reserves and create more budgetary space, assisting governments to reduce their debt burden.

The SDRs are a basket of currencies (the US dollar, Euro, Chinese Yuan, Japanese Yen, and the British Pound) which a member country can potentially claim. SDRs effectively provide a country with liquidity. More importantly, liquidity in a stronger currency.

Read more at: https://businessday.ng/business-economy/article/rising-debt-weak-spending-low-tax-put-nigeria-in-trilemma/

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