The rising debt profile of Nigeria has been generating concern despite assurances by the nation’s economic managers that there is no cause for alarm. The World Bank Group and the International Monetary Fund (IMF) have warned the federal government over its excessive borrowing. World Bank’s Vice President for Africa, Mr Hafez Ghanem, recently urged the federal government to reduce its borrowing and tap private investments that will yield multiplier effects on many sectors of the economy.
Recognising the country’s diminished income capacity and rising debt profile, what the World Bank is saying is that Nigeria ought to increase its income base or take more loans that come with less servicing commitments. However, the Debt Management Office (DMO) has stated that considering the size of the nation’s Gross Domestic Product, Nigeria’s debt level is still sustainable.
According to DMO, the country is only at about 19 percent in debt to GDP ratio. Data from the DMO showed that Nigeria’s total debt increased by about 90 per cent in almost three years, from about N12.6 trillion in December 2015 to about N22.4 trillion as at June. The debt management agency said that the rise in total debt stock was recorded after the federal government issued a $2.5 billion Eurobond in February.
It insists that the Eurobond issuance—the fifth in the history of Nigeria—will not affect debt level and that the issuance will enable the government to refinance a portion of the nation’s existing domestic debt portfolio with external debt at a considerably lower cost.
We commend the government’s effort to rebalance the debt away from domestic debt to external debt. We also urge the government to be cautious in growing the national public debt. Government should rather build strong financial buffers, through enhanced savings of the revenue implications of the difference in the 2018 and other years’ budget benchmark oil price and the market price, among others.
In practical terms, what the World Bank advised the government to do is to take less domestic loans and more foreign loans since domestic loans come with higher interest payment and have shorter tenors. The federal government is said to have made a total of N3.49tn in domestic debt servicing payment between January 2015 and September 2017.
In the same period, the country paid a total of $1.07bn (about N326.69bn) to service foreign loans obtained by both the federal and state governments. This shows the wide gap between the size of the domestic borrowing and foreign borrowing, which has seen the government spend much of its revenues. Between October 2015 and September 2017, the federal government doled out N2.67tn to service local debts. The federal government paid a total of N1.02tn for local debts in 2015. The amount grew to N1.23tn in 2016. For the first nine months of the year 2017, the debt servicing obligation already exceeded that for the entire 2016 as the federal government had already serviced local debts to the tune of N1.24tn. Most of the payments are for interests incurred on the funds borrowed monthly by the federal government using the instrument of FGN Bonds.
In 2016, the interest paid on FGN Bonds amounted to N839.17bn. In the same period, the interest on Nigeria Treasury Bills amounted to N335.58bn, while the interest paid on Treasury Bonds was N28.99bn. Accordingly, 2018, 2021 and 2023 will see Nigeria parting with more than $1bn each of the years, because some Eurobonds issued by the federal government will be due for redemption in each of the three years. Experts have described the provision for debt servicing this year as unsustainable.
The federal government yielded to the advice to borrow more from the foreign debt market because of the huge service payment on domestic debt and it has plans to borrow $3bn from foreign sources in order to refinance some local debts. This strategy will involve reducing the country’s domestic debt to 60 per cent, while raising the external component to 40 per cent.
But economic experts said the rising debt profile could actually scare foreign portfolio investors away from the nation’s economy because it can crash the value of the local currency, a situation that portfolio investors will not like to be part of.
We think that Nigerians should begin to question the efficiency of borrowing by the government, whether it is the present government or former administrations. The purpose of the country’s current borrowings is good on paper but the budgetary process has been frustrating the roll out of infrastructure for which the government had been taking loans.
It is the view of this newspaper that the government must not be profligate with regard to the management of its debt resources.