Rewane: Nigeria Moving from Debt Sustainability to Debt Trap

Gike Onwuamaeze

The Chief Executive Officer of Financial Derivatives Limited, Mr. Bismarch Rewane, has declared that “Nigeria is moving from a debt sustainability path to a debt trap path.”
Nigeria’s total public debt stood at N121.67 trillion in Q1’24, which is made up of N65.65 trillion and N56.02 trillion domestic and external borrowings respectively, comprising of N111.52 trillion federal government’s debt and sub-national government’s N10.15 trillion debts.

Rewane made this declaration in his July 2024 presentation at the LBS Breakfast titled “Death or Debt Trap? 21st Century Road to Economic Salvation,” where he stated that debt accumulation is not bad in itself but its utilisation would determine if it would become a trap.
According to him, proper use of debt could lead to better infrastructure and enhanced public services like healthcare, education, etc., but it could become a trap when its utilisation is directed toward consumption, corruption and mismanagement.

According to him, increasing bilateral and multilateral debt indicated rising financial commitments, increased borrowing for development projects and budgetary support that “suggest potential future financial pressure if the growth in debt is not matched by economic growth and revenue generation.”  
He said that the “high external debt-service-to revenue ratio is a concern and highlights the need for Nigeria to significantly boost its revenue generation capacity.”

Therefore, “continued efforts in economic diversification, export enhancement, and fiscal discipline are essential to maintain and improve Nigeria’s debt sustainability,” he stated.
He also observed that there is a link between debt accumulation and productivity, pointing out that “a higher public debt than total factor productivity leads to several adverse outcomes such as higher interest rates, reduced investment, higher debt servicing costs, fiscal sustainability issues, limited policy flexibility and slower long-term economic growth.”

He also noted that debt service costs had been crowding out infrastructure expenditure, adding that Nigeria spent N5.7 trillion in 2022 on debt servicing.    
According to him, debt service cost was two times more than capital expenditure and nine times more than total health spending in 2022.
In addition, debt service cost was seven times more than total education expenditure (recurrent plus capital) and six times higher than defense spending in 2022.
Rewane also argued that debt servicing costs also come with significant opportunity cost.

He said: “The debt service costs of N8 trillion in 2023 could have been used for 5,000 km of dual carriage roads at N800 million per km; 1,600 schools at N5 billion per school; 80,000 primary healthcare facilities at N100 million per healthcare and 5,000MW of solar power at N1.5 billion per MW.”
He held that the persistent gap between government revenues and expenditures has led to large and growing fiscal deficits in Nigeria due to subsidy payments, weak oil earnings due to suboptimal oil production, debt servicing costs, corruption and misallocation and lack of fiscal discipline, adding that the “EIU projects the fiscal deficit to widen to N19.32 trillion in 2028 from N14.77 trillion in 2024.”

Rewane also explored the link between debt and cost of living crisis, stating that, “economic mismanagement, debt, and the cost-of-living crisis are interconnected as economic mismanagement can lead to excessive debt, which in turn can contribute to a cost-of living crisis.”
He added that debt accumulation could arise from “poor fiscal and monetary policies, inefficient allocation of resources, corruption, and lack of accountability.”
This could lead to excessive borrowing and accumulation of debt and eventually cost-of-living crisis. “High levels of debt can lead to a cost-of-living crisis through inflation, currency depreciation and austerity measures,” Rewane said.

He noted that highly indebted countries are likely to be unstable, adding that “African countries’ high debt burden has become a call for concern. As increased borrowing is leading to soaring debt, countries are becoming entangled in a vicious circle of debt.
“The burden of repaying high debts is increasingly running up against political realities in African countries.”
Stating that Nigeria’s current total debt percentage of GDP is 52 per cent, Rewane cautioned that countries with high debt-to-GDP ratios are at greater risk of falling into a debt trap.
His words: “Nigeria and several African countries have seen increasing debt levels in recent time.
“High levels of debt denominated in foreign currencies can be risky due to exchange rate fluctuations.
“Many African countries, including Nigeria, have significant portions of their debt in foreign currencies
“If economic growth rates are stagnating or declining, it becomes harder to generate the revenue needed to service debt
“High debt-service ratios, where a significant portion of government revenue goes to servicing debt, indicate financial strain.”