Concerns over the Debt Behemoth

Taming Nigeria’s burgeoning debt stock with its increasingly asphyxiating service obligations is cardinal to averting a possible high risk of debt distress, writes Ndubuisi Francis 

Between January and March 31 this year,  Nigeria’s public debt stock, comprising that of the federal,  state, and the Federal Capital Territory (FCT) increased by N2.04 trillion.

In addition to the N39.56 trillion stock as of December 31, 2022, the aggregate public debt stood at N41.6 trillion ( ($100.07 billion) by March 31, 2022.

The domestic debt service obligations of the Federal Government of Nigeria (FGN) alone also amounted to N668,685 billion in three months 

A rapid increase in government debt is a major cause of concern. Generally, the higher a country’s debt-to-GDP ratio is, the higher chance that the country could default on its debt, thereby creating a financial panic in the markets.

While Nigeria’s debt-to-GDP currently stands at 23.27 per cent against 22.43 per cent on December 31, 2021, many are apprehensive that the signs appear to be ominous.

The International Monetary Fund (IMF), the World Bank, economic experts, and many others are raising the alarm that something should be done, and urgently about Nigeria’s debt stock and humongous debt service obligations. 

Borrowing is a global norm. It is in itself not a sin. Even rich nations borrow, but the capacity to pay back is the underlining factor.

The Concerns

Many factors go into assessing how much debt an economy can safely carry.

Countries incur debt by borrowing, which enables them to finance key development programmes and projects. But, taken too far, the burden of debt repayment can overwhelm a country’s finances, at worst leading to default.

Elevated debt in low-income countries and emerging market economies in recent years has raised concerns about countries’ capacity to sustain these levels of debt. 

The International Monetary Fund (IMF) recently warned that debt vulnerabilities remain elevated in Sub-Saharan Africa, with no fewer than 20 countries in the region either at high risk of debt distress or already in debt distress. Fortunately, Nigeria is not one of them.

Also, 30 countries in the developing world have high levels of debt distress, meaning they are experiencing great difficulties in servicing their debt.  

The 2020 Debt Sustainability Analysis (DSA), the latest by the Debt Management Office (DMO) revealed that Nigeria is at Moderate Risk of Debt Distress.

But as public debt continues to pile up, for how long can the country remain in the safe corridor?

According to the IMF, Nigeria spent 86 per cent of its revenue on debt servicing in 2021, leaving little room to do anything else tangible. The high rate charged by investors for servicing debt is attributed to the country’s risky economic environment. South Africa’s total debt of $261 billion for instance, almost thrice that of Nigeria in the same period attracted a 20 per cent debt service.   

Only last week, the multilateral lender explained that with Nigeria’s fuel subsidy payout averaging N500 billion monthly, total expenditure on subsidy could hit a record N6 trillion mark by year the end of 2022.

The IMF also revealed that a macro-fiscal stress test conducted on the country showed that interest payments on debts in the country could amount to Nigeria using 100 per cent of its revenue to service debts by 2026 if not closely monitored.

While unveiling the latest Sub-Saharan Africa Regional Economic Outlook, in Abuja, the IMF Resident Representative for Nigeria, Mr. Ari Aisen expressed worry that many African countries, including Nigeria risk sliding into critical debt servicing problems unless urgent actions were explored to significantly raise revenue.

Aisen lamented that committing over 80 per cent of Nigeria’s revenue to debt service is nothing short of an “existential problem.”

His words: “It is a reflection of low revenue.  It is an existential issue for Nigeria.  It is essential for macroeconomic stability.  It is important for the provision of social service.” 

The Real Issues

The major problem with Nigeria’s debt is traceable to revenue shortage. While the country is imbued with enormous potential to raise adequate revenue to meet its debt obligations, the contradictions in the system make this difficult.

Nothing explains this better than the current paradox where the country is not only unable to take advantage of the present global high oil prices to build reserves but is also confronted by low earnings due to the subsidy on petroleum products.

A combination of fuel importation and the accompanying subsidy payment as well as failure to meet production quota has robbed the country of the potentially huge revenue accruing from the increasing prices of oil n the global market.

Following the passage of the Petroleum Industry Act (PIA) 2021, a subsidy on fuel was designed to end in February 2022. But this was extended to June by the federal government under the guise of putting in place palliatives to cushion the impact of ending subsidies on the vulnerable.

This was later  extended by 18 months, with an additional N4 trillion approved to cover subsidy payments for 2022, effectively adding to the government’s borrowing and by extension, the debt stock

The World Bank has warned that increasing fuel subsidy puts the Nigerian economy at a high risk as subsidy payments could significantly impact public finance and pose debt sustainability concerns.

According to the bank, Nigeria is projected to have a 3.8 per cent growth in 2022, adding that as an oil-dependent country, weak oil production hampers economic recovery.

It added that the increasing fuel subsidy poses a high risk to the country’s economic growth, despite the increase in oil prices.

“Growth in Nigeria is forecast to increase to 3.8 per cent in 2022 and stabilise at 4 per cent in 2023-24. Real GDP growth was revised by 1.2 percentage points for both periods compared with the previous forecast. 

“Nigeria’s economy is still dependent on the oil sector. Oil-related revenue contributes 40 to 60 per cent of fiscal revenue, while oil and gas account for 80 to 90 per cent of total exports.

“Weak oil production, below the OPEC quota, held back the recovery process. Although at a slower pace than the average seven per cent during the boom period, growth prospects for the Nigerian economy are somewhat bright thanks to high oil prices coupled with reforms initiated by the passing of the Petroleum Industry Act and the completion of the Dangote refinery expected in 2023.

“Risk remains high on increasing fuel subsidies, which could weigh heavily on public finance and pose debt sustainability concerns. Nevertheless, public debt as a percentage of GDP is currently moderate,” the bank said.

According to the World Bank, the high level of oil prices will affect countries that are shielding the impact on their consumers through fuel subsidies, such as Nigeria and Ethiopia.

It added that the high cost of fuel subsidies, due to the increase in oil prices, may deteriorate the country’s fiscal balance.

The Revenue Challenge

Federal government revenue has been constrained in recent times by the underperformance of oil revenue due to the continuous decline in production capacity and volatility in the price of crude oil.

But for more than seven months, there is a rallying of oil prices, particularly with the Russia-Ukraine war.

Even with oil production recording an increase following the sustained war against oil theft, this has not reflected positively in terms of revenue generation.

Nigeria spent N4.22 trillion on debt servicing in 2021, increasing by 29.3 per cent compared to N3.27 trillion spent in the previous year. On the other hand, revenue for the period only increased marginally by 9.3 per cent to N4.39 trillion.

This means that Nigeria spent about 96% of its revenue on servicing debt obligations in the year under review. Compared to the previous year, Nigeria’s debt service-to-revenue ratio increased from 81.1 per cent in 2020 to 96 per cent in the year under review.

The Way Out 

While the nation’s total public debt of N41.6 trillion is already raising concerns, of greater interest is that the debt is not inclusive of the FGN’s N18.16 trillion debt to the Central Bank of Nigeria (CBN), extended to it as overdrafts by the apex bank under the bank’s Ways and Means (W&M) window.

According to Section 38 of the CBN Act, 2007, the bank may grant temporary advances to the federal government in respect of temporary deficiency of budget revenue at such rate of interest as the bank may determine.

The IMF had warned: “The increasing reliance on CBN overdrafts has come with negative consequences. The financing is costly for the federal government at interest rates of MPR plus 300 basis points, and for the CBN, with sterilisation done through the issuance of OMO bills.” 

The World Bank had also warned against the resort to the W&M window while the CBN itself admitted that the federal government’s borrowing from it through the Ways and Means Advances could have adverse effects on the bank’s monetary policy to the detriment of domestic prices and exchange rates.

In a letter of intent to the IMF last year, the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, and the CBN Governor, Mr. Godwin Emefiele, said the recourse to central bank financing would be eliminated by 2025.

As a way out, the Debt Management Office (DMO) had over a year ago indicated that there was an urgent move to securitise the government’s debts to the CBN by converting them to bonds.

While the federal government has consistently maintained that Nigeria’s debt is sustainable and that the problem is revenue, it is high time that it addressed that challenge.

The fears by the IMF, the World Bank,  other institutions, and experts, particularly on the amount expended on debt service elicit worries from different quarters.

While officials insist the nation’s debt is sustainable, the ingredients of unsustainable debt are increasingly becoming bullish.

Everything must be done to ward off an unsustainable debt scenario.

Should debt become unsustainable, this could lead to high debt distress, where a country is unable to fulfill its financial obligations and resorts to debt restructuring as some African countries are currently facing.