Viewpoint - December 16, 2021

Nigeria’s burgeoning public debts and the coming Armageddon

By Sam Amadi

The report that China is taking over the Entebbe International Airport in Kampala because of Uganda’s failure to repay the Chinese loan for it will interest Nigerians.

Uganda had tried to negotiate variation to the terms of the loan, but China rebuffed the move.

Entebbe is the main international airport in Uganda with significant air traffic. But the curse of debts means that such a strategic asset will be in the control of China on account of bad debt.

Nigeria is not risking a takeover by the Chinese. But its public debt constrains any sustainable development and compounds the crises of poverty and insecurity.

Nigeria risks economic collapse if it does not get a handle on the economic implications of its burgeoning public debts at national and subnational levels.

As of June 2021, Nigeria’s total public debt (both domestic and foreign) was $86.571 billion, comprising of $33.468 billion (36.68%) foreign debt.

The Debt Management Office (DMO) said on Tuesday the figure has risen to about N38. 005trillion, or $92.626billion as of September 30,2021.

Nigeria’s Debt-to-GDP ratio is about 25 percent. Considering that the World Bank recommends 50 percent as the threshold for Debt-to-GDP ratio, there is a veneer of sustainability to Nigeria’s public debt.

But this is nothing but a veneer. The truth is that Nigeria’s debt is not sustainable if we go beyond Debt-to-GDP and consider the Debt-to-Revenue and Debt-to-Expenditure ratios.

These indicators are more important in debt sustainability than Debt-to-GDP considering Nigeria’s poverty level and the need for investment in social and physical infrastructure.

Based on Debt-to-GDP, the Minister of Finance, Zainab Ahmed, has assured that Nigeria’s public debt is sustainable, and the country should continue to borrow for infrastructure development.

This is false to the extent that it overlooks the implication of rising debt profile and increasing fiscal crisis. Nigeria’s debt is not sustainable, because it costs Nigeria so much to service its debt.

The danger of debt is when average rate of interest is more than the rate of increase of the debt.

In May 2021, Nigeria’s debt servicing to revenue was 98 percent as against international prudential benchmark of 22.5 percent. This translates to Nigeria spending 98 percent of its revenue on servicing debts alone.

So, for every N100, the country makes, largely from oil export receipts, it spends N98 to service its debt and only N2 for critical public expenditures.

Nothing is more unsustainable than this. Nigeria revenue is shrinking, and its fiscal deficit is growing at a geometrical proportion.

This means that we are getting to where the entire national revenue will be inadequate to service debts.

Nigeria will plunge more into debt to just keep up with its debt servicing obligation. Debt service to revenue is expected to rise to about 395 percent in 2022.

To understand the precarity of Nigeria’s public debt profile, compare it with those of comparable African countries.

South Africa has a higher Debt-to GDP ratio than Nigeria (32 percent to Nigeria’s 25 percent), a lower Debt Servicing-to-Revenue ratio of 13.7 percent (Nigeria is 98 percent) and a higher Revenue-to-Debt ratio of 291 percent, compared to Nigeria’s 7 percent.

Kenya is in far better position than Nigeria. Its Debt-to-GDP is 55.6 percent, Debt Servicing-to-Revenue of 34.8 percent and Revenue-to-Debt of 198 percent. (Note that some of the data are 2017 data).

The Minister of Finance recognized that Nigeria’s is poor compared with other African countries in the indicators that determine the wellbeing of the people and the stability of its federation.

But Nigeria is constrained by growing fiscal deficit to borrow more and more.

The eminent economist, Dudley Seer, advises us to always ask: “What has been happening to poverty? What has been happening to unemployment? What has been happening to inequality?”

With over 100 million poor citizens and one of the highest inequalities in the world (Gini-coefficient of 40 percent in 2017), Nigeria needs to spend more and more on capital projects and in cash transfers.

With a revenue to debt profile of 7 (in 2017), the country faces a huge crisis of stimulating economic growth and human development.

We cannot continue on the journey to ‘nowhere’.

The President Muhammadu Buhari administration is readying fresh application for more loans. Since 1923-24 when the country borrowed 5.7 million pounds from London creditors, each administrator has resorted to borrowing to fund capital projects, and there is little to show for it.

The Buhari administration may be borrowing more for recurrent expenditure considering the ratio of recurrent to capital expenditure in the national budget.

Furthermore, we are facing one of the most severe revenue crises since 1999. The government manages the fiscal deficit with more borrowings. To service our debts, we have to spend export earnings, constrain export, or borrow more.

But we cannot borrow our way out of the combination of severe fiscal deficit and grave revenue shortfall. We have to produce ourselves out of it.

We need to boost productivity through wise economic policies; policies that incentivize production, not consumption; policies that turn every corner of the country into a factory or a plantation, so we generate more revenue to service our debts and invest in social and physical infrastructure.

If we don’t expand production, we are waiting for Armageddon, the result of fiscal deficit joining with revenue shortfall, increasing poverty and spiralling inequalities.

Amadi, a former Chairman of the Nigerian Electricity Regulatory Commission, is the Director of Abuja School of Social and Political Thoughts.

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