The debt sustainability debate

Last week Nigeria’s Debt Management Office (DMO) rose to a spirited defence of the federal government’s ludicrous and unsustainable borrowing spree. DMO inauspiciously defended fresh borrowings that pushed Nigeria’s total debt to $100 billion (N41 trillion).

The Federal government believes that Nigeria’s debt is still sustainable. However, all the red flags from the World Bank, International Monetary Fund (IMF), JP Morgan and the Babel of voices from Nigeria suggest that Nigeria’s debts have become too burdensome for its miserable revenue.

Nigeria’s debt to gross domestic product (GDP) ratio is deceptively low. With total debt now at $100 billion (N41 trillion) the GDP ratio is slightly below 30 per cent.

Government officials in their clumsy defence of Nigeria’s mounting debt often point to the United States of America (USA), the world’s largest economy, as a classic case of excessive borrowing. U.S. debt is $21 trillion, about 105 per cent of its $19.5 trillion GDP.

Nigerian government officials would gleefully point to Argentina as a classic example of a highly developed economy that is heavily dependent on massive borrowing. Argentina’s total debt is $305 billion – 75 per cent of its GDP.

Last week thousands took to the streets to protest Argentina’s plan to repay IMF loans. They want the money to be used to shore up the crumbling economy. Argentina is battling inflation rate of 70 per cent.

Sri-Lanka’s President Gotabaya Rajapaksa resigned last week and fled to Singapore after thousands raided his official residence to protest the 54 per cent inflation rate and an economy tottering on the brink.

Sri-Lanka, an island nation of 20 million with a higher standard of living than Nigeria, is bankrupt. With its national debt to GDP ratio of 115 per cent, it can no longer muster the foreign exchange to import petrol and cooking gas. Motorists queue at fuel retail outlets for two days only to get 14 liters of petrol.

Nigeria’s debt to GDP ratio is about one quarter of Sri-Lanka’s but Nigeria is already choking because of abysmally low revenue and unbearable cost of debt servicing.

Argentina with $305 billion debt may be more comfortable than Nigeria with $100 billion debt. The difference is that Argentina borrowed to sustain an egalitarian social security system, while Nigeria borrowed to sustain politicians’ opulent lifestyle.

Argentina enjoys a wider revenue base from numerous export products. Nigeria’s economy is one-handed. About 90 per cent of its export revenue comes from crude oil sales. Argentina exports processed agric products which sell at higher prices.

Nigeria exports crude oil at a price determined by buyers and imports all its refined petroleum products at outrageous prices fixed by sellers. Consequently, Nigeria’s revenue is a scant 6.3 per cent of GDP when Argentina earns about four times that.

The percentage of revenue that goes into debt service is even more disheartening. That is a clear indication that Nigeria’s debt is no longer sustainable. Nigeria spends 90 per cent of its lean revenue on debt service.

The situation assumed critical proportions in June 2021 when government had to service its debt with 93 per cent of revenue, leaving a scant seven per cent for its outrageous salary bills and alarmingly high cost of governance. The IMF has warned that Nigeria will spend 97 per cent of its revenue on debt service in 2023.

That is why everyone is worried that the federal government is still borrowing to fund its services rather than exploring other means of funding Nigeria’s yawning budget deficits.

The problem with the debt burden is that international creditors rate Nigeria as a high risk borrower. That automatically translates to outrageous lending rates.

With dwindling revenue, Nigeria’s debt instruments could only attract foreign investors willing to take risk.

Investors factor the risk into their lending rates. Where the U.S. borrows at 1.5 per cent, Nigeria now borrows at 12 per cent.

That is because Nigerian National Petroleum Company (NNPC) Limited makes dubious deductions from crude oil export proceeds in the name of petrol subsidy, thus compelling Nigeria’s foreign creditors to conclude that what is left of the lean forex can no longer guarantee the payment of Nigeria’s debts.

That explains why Nigeria services its debt with 90 per cent of revenue. It can no longer borrow at seven per cent as it did two years ago. The solution to the problem is in massive revenue mobilization and plugging the leakages that divert huge funds into private pockets.

Nigeria is a very lazy and fraudulent tax collector. It has the lowest tax to GDP ratio in the whole of the Economic Community of West African States (ECOWAS).

The Federal Inland Revenue Service (FIRS), the federal government official tax collector toils to chip in tax revenue that amounts to a miserable 6.5 per cent of GDP.

Again, corruption is at the root of Nigeria’s abysmally low tax revenue. Cumulatively, the tax collectors are richer than the federal government. They collect more into their pockets.

Recently, FIRS announced publicly that the South African parent company of DSTV and GoTV, a domineering pay television network in Nigeria, has not paid tax since it entered Nigeria in 1998.

FIRS calculated the tax liability of the pay TV network at N2.6 trillion. Everyone was sad that a company from South Africa, Nigeria’s arch-enemy, could evade tax for 25 years.

The announcement drew flaks from all angles with protesters demanding that the tax arrears should not only be collected with interest but that the company directors should be prosecuted. The media hype lasted a few weeks and fizzled out. No one knows what FIRS has done to DSTV over the tax scandal.

Thousands of operators in Nigeria’s unwieldy informal sector muster daily turnover in seven digits but conveniently evade tax.

Three years ago FIRS passively announced the discovery of 6, 300 bank accounts with average deposits of N2 billion in each of the accounts. The account owners pay no tax. No one knows what FIRS has done to the tax evading depositors.

Nigeria has the world’s most scandalous crude oil theft record. About 500, 000 barrels of crude oil is stolen daily in what amounts to inauspicious allocation to politicians and retired generals.

Nigeria Customs Service (NCS) chips in N1.2 trillion as import duties when it collects well over N5 trillion yearly.

If those leakages are plugged, government would no longer need loans to balance its budget. If the tax to GDP ratio inches up to the ECOWAS average of 15 per cent, the federal government could be funding its budgets with tax revenue even without crude oil sales proceeds.