Dwindling revenue, debt-servicing: Nigeria’s economy on the precipice

The debate on Nigeria’s debt servicing continues to swell with analysts insisting that it is becoming unsustainable, especially with half the country’s earnings going into debt-servicing; BENJAMIN UMUTEME takes a look at the issue in this report.

The controversy surrounding Nigeria’s debt-servicing obligation will not just go away. Even when it seemed that it was about to die down, former President Olusegun Obasanjo set tongues wagging once more when at a function last weekend in Lagos he said the nation’s economy was at the precipice, especially with the way fiscal authorities were engaged in borrowing.

The former president, during his two-term, was not only able to get debt forgiveness for the country, he was also able to leave a substantial amount of money as savings before leaving office in 2003.

Rising debt levels

Blueprint Weekend checks revealed that the country’s public debt profile has continued to rise, hitting $83.882.66 billion as at June 2019, from $63.806.52 billion in June 2015.

A breakdown of the debt showed that public debt rose steadily from $61,447.01 billion in June 2016 to $64,194.13 billion in 2017, before hitting $73,207.94 billion by 2018.

The figure represents a $20.076.21 billion increase between June 2015 and June 2019.

According to the Debt Management Office (DMO), the total external debt stands at $27.16 billion, while Domestic debt climbs to $56.72 billion.

President Muhammadu Buhari last month re-sent the $29.96 billion 2016-2018 external borrowing plan to the Senate for consideration and approval. The Debt Management Office (DMO) states that the country’s external borrowing stands at about 32 per cent, while the 68 per cent is domestic.

The federal ministry of finance, budget and national planning in a June 30, 2019, circular revealed that that a total sum of N1.11 trillion was released to service debt in the first six months of last year.

According to President Buhari in the letter, the loan is to take care of critical projects consisting of a Projects and Programme loan of $11.274 billion, $10.686 billion, Special National Infrastructure Projects, Euro Bonds of $4.5 billion and federal government budget Support of $3.5 billion.

Borrowing to service debts

Data obtained from BudGit showed that debt to revenue ratio which was 43.6 per cent in 2011 rose to 162.8 per cent in 2016 before sliding to 125.7 per cent in 2017.

The World Bank prescribes debt service to revenue ratio of not more than 22.5 per cent. But presently, Nigeria’s debt service to revenue ration is at 60 per cent which means that for every N100 earned the country spends 60 per cent on servicing debt.

In 2019, the sum of N2.14 trillion was spent on debt servicing which represented about 24.3 per cent of the entire N8.83 trillion budget.

According to the Central Bank of Nigeria (CBN), the country spent N399.8 billion in 11 months to service its debts.

Also, in its West Africa Economic Outlook 2019, African Development Bank stated that servicing of Nigeria’s external debts gulped about 50 per cent of the country’s revenue.

Speaking on the debt-servicing issue, Obasanjo said Nigeria was already borrowing to service existing loans.

He said, “As at 2015, total external debt was about $10.32 billion. In four years, our external debt grew to N24.947 trillion or $81.274 billion. To service this current level of indebtedness, we must commit at least 50 per cent of our foreign earnings, such a situation tells about an impending bankruptcy because no entity can survive while devoting 50 per cent of its revenue to debt servicing.

“In 2018, total debt servicing cost took over 60 per cent of government revenue. As if this is not bad enough, we are currently seeking to add another $29.6 billion loan to our already overburdened debt portfolio.”

“Our current budget, out of which we are spending 25 per cent to service debt is not our total earnings, a lot of it is also borrowing. We are borrowing to service what we have borrowed and yet we are borrowing more.”

In chat with this reporter in Abuja, a development expert, Joe Afolayan, said the “costs and ability to service the loans are major concerns.”

“In 2018, and the first half of 2019, we have used 54 per cent of our earned revenue on debt-servicing. My only concern is that we are seeking to borrow in foreign currency.

“This comes with all its accompanying foreign exchange risks and exposure. With the unstable fluctuations in the price of oil, we risk defaulting on the loans,” he said.

Expressing worry over the huge amount of N2.4 trillion to be spent by the federal government on debt-servicing in 2020, the president, Chartered Institute of Bankers of Nigeria, Dr. Uche Olowu, said it was harmful to the economy.

The federal government will be spending the sum of N10.002 trillion for the 2020 financial year.

He said, “That is a warning signal, and I hope those debts have been judiciously used because we are serving debt. If the expected impact outcome is not achieved, then we are back to status quo.”

In his reaction, a former president of the Association of National Accountants of Nigeria (ANAN), Dr. Sam Nzekwe, said the amount for debt-servicing “is disturbing.”

According to him, when a country is spending about a quarter of its budget on debt servicing, there is a problem.

“The government must think twice, especially when you are funding the budget through loans. We need to see how to increase investment in capital projects.”

An analyst, Jide Ojo, said the huge amount budgeted for debt-servicing was a consequence of the huge debts government accumulated over the years.

“Considering the huge amount earmarked for debt servicing, it will be so because of our country’s huge debt profile. Our debt portfolio under this administration has almost doubled what it inherited in 2015,” he said.

The executive director, Civil Society Legislative Advocacy Centre (CISLAC), Auwal Musa (Rafsanjani), noted that increased allocation to debt servicing with affect government’s investment in key areas of human development like health and education.

According to him, the country may not realise half of its projection on capital projects.

 “Again with too much debt incurred under this administration, both domestic and international, we will be spending a lot to service debts. Therefore, by implication, key areas that would benefit the poor would not be a priority, like health and education,” he said.

 Obasanjo also said the situation “will get worse when oil and gas that we rely on no longer commands premium demand as in the past and this is when the real impact of these debts we are piling will start to bite.”

Accumulation of debts

Looking at it from a different perspective, the head of the Human and Environmental Development Agenda (HEDA), Lanre Suraj, noted that debt- servicing is in itself not a problem, but the accumulation of the debts.

 He said, “The debt, if as a consequence of previous government development programmes funded by creditors and contractors due to insufficient funds at the disposal of the government, is tantamount to the payment of a judiciously utilised advanced fund. Some of the funds used for debt servicing could also be generated from the initiated projects.

“Paying outstanding debt also improves the credibility of the country and increases the confidence of contractors and creditors to invest in the country.”

He, however, argued that the means by which the debts were accumulated could defeat the essence of the debt servicing.

“We, therefore, must interrogate the debts accumulated and nature of the debts to understand and situate consequences of actions of the past.”

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