For many years now, Nigeria’s debt stock has been increasing steadily despite repeated advice from local and international financial institutions against high vulnerability to risks in the near future. The latest figures from the Debt Management Office (DMO) have reinforced the need to be cautious and follow guidelines on borrowing limit. At the moment, the guidelines are not faithfully adhered to.
According to DMO, Nigeria’s debt stock as at the end of December 2017 stood at N21.7trn. Of this amount, the domestic debt incurred by the Federal Government was N12.589trn, while that of the 36 states and the Federal Capital Territory (FCT) was put at N3.348trn. External debt of the Federal Government, the states and FCT was N5.78trn, making the gross total N21.7trn. The Director General of the DMO, Dr. Patience Oniha, confirmed this at a press briefing in Abuja.
The DMO also explained that the proceeds of $2.5bn Eurobond issued last month (February), was being used to pay at maturity domestic debt, beginning with N130bn Nigeria’s Treasury Bill that was repaid on March 1, 2018. In addition, she disclosed that composition of the debt stock as at 2017, showed that external debt was 26.64 percent of the portfolio, up from 20.04 percent in 2016,while domestic debt was 73.36 percent, down from 79.96 percent in 2016.
On possible debt trap, she allayed such fears, stating that the nation’s debt stock remains within the threshold of 56 percent for countries in Nigeria’s peer group. Also, the Minister of Finance, Mrs. Kemi Adeosun, had expressed the same optimism and stressed that Nigeria’s capacity to offset the current debt stock, as the debt to GDP ratio remains low compared to other countries. According to her, government’s borrowing was a deliberate decision, primarily to invest in infrastructure development, and that the benefits of the loans would soon be visible and their impact felt by Nigerians. About N2.5trn was said to have been spent on infrastructure in the last three years. Nothing is really wrong with such optimism by the minister. Such loans, which have been on steady rise since the present administration came to power, will be justified if properly invested in capital projects that the country desperately needs. Sadly, that has not always been the case. The concerns about misapplication of loans predate the present government. Though government insists its current borrowing along with tax policies will continue as options to ramp up economic growth, there is the need for caution.
In spite of the fact that Nigeria’s debt stock remains within the internationally accepted threshold, there are worrying signs that the present borrowing pattern could spiral out of control. For instance, Nigeria’s debt- to- revenue ratio has increased by 25 percent in less than 2 years. In 2015, the debt-revenue-ratio was 35 percent. It rose to 60 percent in 2016. Last year, the DMO set borrowing limit of $22bn (about N6.4trn) for the Federal Government. It is not clear if the government complied with that.
Also, last year, the World Bank, the International Monetary Fund (IMF) and Fitch Ratings, cautioned the Federal Government against rising debt stock because of high vulnerability to risks in the future. Fitch Ratings stated in its report last year that Federal Government’s debt had reached 320 percent over annual revenue projection. This was above the median of 196 percent for countries in Africa and the Middle East, rated by Fitch.
Before its latest release of Nigeria’s public debt, the DMO expressed concern that the debt profile had started to experience “deterioration”, even though it remained within the accepted threshold. Similarly, government admitted last year during the unveiling of the Economic Recovery and Growth Plan (ERGP) that public debt had risen in recent years, due to increasing borrowings by both the federal and state governments. There is urgent need for government to scale down domestic borrowing and spend prudently. It is worrisome that the debt profiles of most states have exceeded 50 percent of their annual revenue. This contradicts the fiscal responsibility guidelines which state that the debt status of each state should not exceed 50 percent of its statutory revenue in the previous year. Unfortunately, most states have flouted the guidelines and many have already borrowed above their threshold, ostensibly to finance their budget deficits as a result of declining revenue. Altogether, a new approach and stricter rules are needed for federal and states’ loans to avoid another debt trap.