The African Development Bank (AfDB) has revealed that Nigeria spends over 50 per cent of its revenue on debt serving. In its West Africa Economic Outlook 2019, the AfDB put the average revenue spent by West African countries on external debt servicing at 17 per cent. This, it says, is high and even much higher in Nigeria which spends about 50 per cent of its revenue on external debt servicing alone.
According to the AfDB, with increased domestic debt already incurred by Nigerian government, there is an intense pressure on the percentage of revenue spent on debt servicing. This has raised Nigeria’s debt burden by as much as 128 per cent in the last eight years, even though Nigeria’s debt to Gross Domestic Product (GDP) remains low. The low debt-to-GDP ratio notwithstanding, the African Development Bank cautioned Nigeria that the rising debt burden was due to the high proportion of revenue spent on debt servicing.
The bank also warned that the rapid increase in Nigeria’s external indebtedness remain a huge challenge, especially given the shift toward non-concessional external debt. In addition, debt service payments have increased since 2010 and are projected to remain high in the medium term. This could heighten the fiscal burden in an already fiscally and growth-constrained environment. We recall that the Governor of the Central Bank (CBN), Godwin Emefiele, recently warned about these constraints.
The AfDB’s warning against the hefty amount being spent on debt servicing is timely. The International Monetary Fund (IMF) last year spoke in the same vein. Government should heed these warnings to avert looming debt overhang. Government was reported to have spent N2.21trn on domestic debt servicing alone in the first nine months of 2018. Currently, Nigeria’s total debt stock is about N24trn.
Also, in 2017, Government spent N1.823trn on debt servicing, indicating a shortfall of N17.45bn (or 0.95 percent) over the projected N1.84.35trn in the budget for that year. While N1.455trn went into domestic debt servicing, N181.40bn was spent to service external debt in 2017.
It is high time government scaled down the amount spent on debt servicing so as not crowd out other developmental projects. There is need to broaden the revenue base and diversify the economy. We agree with the AfDB report that for countries like Nigeria and Ghana which are moving away from low-income status to middle-income status, the possibility of accessing concessional debt or increasing the proportion of grants appears remote.
The way forward is to contract debt of longer maturities and favourable terms, including longer grace periods that coincide with the gestation of the projects that the debt facility was taken.
We reiterate the need for government to always recognise the potential risk of investing the loans in unproductive projects that will not be able to repay them with interests. Essentially, there is nothing wrong with borrowing. Every nation borrows and incurs debt. Nigeria’s problem is always borrowing and investing in areas that do not stimulate the economy.
Sometimes also, the loans are either not invested in capital projects or misappropriated. It pays when government borrows cautiously and spends prudently. Government must strictly abide by the Fiscal Responsibility Act on borrowing. Sections 41-44 stipulate the framework for debt management and how the proceeds of such borrowing shall be applied and the role of government agencies in ensuring compliance with the limits and conditions for borrowing by each tier of government in the Federation.
While we do not encourage the government to default in debt servicing, appropriate plans should be put in place to ensure that the debts are timely serviced. This is why government must broaden the revenue base.