How Public Debt Overload Hinders Growth of Private Enterprises
Rising public borrowing in Nigeria is suffocating private businesses, as banks prioritise government loans, leaving entrepreneurs gasping for credit and stifling economic growth, writes Festus Akanbi
In Nigeria, where rising unemployment is a big deal, economists say a thriving small and medium-scale enterprises sector would have absorbed a greater percentage of the youth currently roaming the street in search of non-existing jobs.
This is because small businesses are recognised worldwide as a catalyst of socio-economic development.
Almost all successive administrations in Nigeria have reiterated the fact that part of the economic development diversification effort is to develop entrepreneurship and small businesses.
There is no doubt that the most crucial aspect of SMEs in Nigeria is their contribution to employing most citizens.
Unfortunately, most of the SMEs die in infancy. Although, the reasons behind the failure of this level of entrepreneurial efforts are legion, the most crucial is that of the dearth of financial support. Many banks are not interested in this level of business.
NACCIMA’s Protest
But given a recent protest by the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA) over the crowding of the private sector from banks by the government, it is obvious the SMEs are not the only sector currently facing the problem of funding by the banks.
NACCIMA, in a widely reported protest, expressed concerns over the burgeoning rate of public sector borrowing from domestic banking institutions which has continued to rise unsustainably.
The association said the government’s involvement in the banking sector had resulted in a crowding-out effect, whereby private sector entities are currently “facing exorbitant barriers to accessing finance, which in turn stifles their capacity for growth and contribution to the national economy”.
The group’s position was contained in a letter dated March 13, 2024, which was addressed to both the Minister of Finance and Coordinating Minister of the Economy, Mr. Wale Edun, and the Governor of the Central Bank of Nigeria (CBN), Mr. Olayemi Cardoso, and signed by the National President, NACCIMA, Mr. Dele Kelvin Oye.
NACCIMA in its correspondence, titled, “Strategic Imperatives for Redressing Financial Disparities and Augmenting Economic Viability in Nigeria”, pointed out that while the association acknowledged the difficult challenges inherited by the current administration, “We also believe that opportunities exist for Nigeria to explore new ways of addressing the challenges of the current global economic climate.”
To ameliorate this, the chamber said, “The CBN, in strategic alignment with the Ministry of Finance, must architect a cohesive blueprint to minimise the inflationary effect of monthly FAAC allocations and the insatiable borrowing proclivities of the public sector.
“Such a regime would release significant capital within the banking system, thus enabling more optimal allocation of resources and extension of credit to private enterprises at more competitive rates for entrepreneurial innovation and investment.”
The association said public and private sector liquidity management should be addressed on a sectoral basis and called for the establishment of a robust forward pricing exchange rate mechanism to facilitate investment planning, stability, and long-term economic prosperity.
It further recommended sectoral limits on public sector borrowing and bond issuance as well as public sector debt repayments from excess FAAC allocations to free up funds for the real sector.
Banks’ Lending to Public, Private Sectors
On the face value, the output of Nigerian banks to the economy looks good. This is because a recent breakdown of the Money and Credit Statistics report published by the Central Bank of Nigeria showed that the financial sector’s credit to the economy grew Month-on-Month (MoM) by two per cent to N114.7 trillion in February 2024 from N112.4 trillion in January 2024.
A further breakdown of the report shows that banks’ credit to the private sector increased MoM by six per cent to N80.8 trillion in February from N76.2 trillion in January.
The report, however, stated that credit to the government fell MoM by 6.3 per cent to N33.9 trillion in February from N36.17 trillion in January.
Despite the fall in credit to the government, the country’s recent debt profile data published by the Debt Management Office (DMO) showed that public debt stood at N97 trillion in the fourth quarter of 2023 (Q4’23), representing a 10 per cent increase from N87.8 trillion in Q3’24.
According to DMO, the increase in the debt stock was largely due to new domestic borrowing by the federal government to partly finance the deficit in the 2024 Appropriation Act and disbursements by multilateral and bilateral lenders.
Government Borrowing
Government borrowing becomes necessary when revenue sources are inadequate to finance growing government expenditures. The Nigerian economy has witnessed poor revenue growth because of over-dependence on volatile oil revenue and low tax capacity. The country’s debt stock as a result has increased considerably over the past decades – a trend generally connected with expansion in the size of government expenditures. The associated repayment and servicing of these debts often result in the diversion of productive funds towards debt repayments thereby limiting the government’s ability to provide basic infrastructures that benefit the poor.
Nigeria’s external indebtedness includes Eurobonds: $15.12bn, Int’l Development Association: $14.96bn, Exim Bank of China: $5.17bn, International Monetary Fund: $2.47bn, African Development Bank: $1.65bn, African Development Fund: $1.00bn, Agence Francaise Development: $580.1m and Internationale Bank for Reconstruction & Development: $485.5m.
Crowding out Private Sector
A Lagos-based banker, Mr. Stephen Ogunshola, told THISDAY that government borrowing from banks can have a detrimental effect on businesses in Nigeria for several reasons.
One of the effects of excessive borrowings from the government, according to him, is the crowding out effect.
He explained that when the government borrows extensively from banks, it increases the demand for loanable funds, which can lead to higher interest rates. This, according to him, “crowds out” private sector borrowers, making it more expensive for businesses to borrow money for investment or expansion.
The scenario, he argues can also lead to limited credit availability, pointing out that as banks allocate a significant portion of their funds to the government, they have less to lend to businesses. This reduced availability of credit can stifle business growth and limit their ability to invest in new projects, purchase equipment, or hire more employees.
The government’s excessive borrowings, he added, can also lead to higher interest rates. “Government borrowing can drive up interest rates, making it more costly for businesses to service existing debt or take out new loans. High-interest rates can eat into profits, making it difficult for businesses to remain competitive and sustain operations,” he said.
Analysts also believe that when the government borrows, it may lead to reduced investment. They maintain that with limited access to credit and higher borrowing costs, businesses may scale back their investment plans or postpone expansion projects. This can result in lower productivity, reduced employment opportunities, and slower economic growth in the long run.
Overall, excessive government borrowing from banks can create an unfavourable environment for businesses in Nigeria, constraining their ability to thrive and contribute to economic development.
This is why analysts insist that one way of encouraging private sector-led initiatives is for the government to review its borrowing pattern in a way to give private sector operators the confidence and access to funds they so desire.
The government also can improve the private sector’s access to funding by implementing policies that foster a conducive business environment. This includes maintaining stable macroeconomic conditions, implementing transparent and efficient regulatory frameworks, providing incentives for banks to lend to private businesses, promoting financial literacy among entrepreneurs, and investing in infrastructure and technology to reduce operating costs and enhance productivity.
Additionally, the government can establish credit guarantee schemes, facilitate public-private partnerships, and support the development of capital markets to diversify funding sources for businesses. These measures collectively can encourage banks to extend credit to the private sector, thus promoting economic growth and job creation.
