Tuesday, February 27, 2024

How The Federal Government’s Relentless Borrowing Will Lead To A Debt Trap

With the federal government resorting to borrowing in order to drive development and stimulate economic growth, Nigeria surely cannot escape the consequences of a rising debt profile. Our nation’s domestic and external debt have now risen to ridiculously high levels. No doubt, countries borrow internally and externally to grow their economy, sustain development and ultimately improve the living standard of their citizenry; and Nigeria is obviously no exception.


But in the last few years, a lot of Nigerians have become concerned about the possible adverse consequences of our mounting debt. There is also the valid fear of a reduction in private sector investment, among others. To be clear, borrowing has never been a problem. Nigeria relies heavily on external funding to finance infrastructural projects like roads, electricity-generation plants, rails, health, housing, education, etc. The issue is this: what have we been borrowing for? To pay salaries or to build infrastructure?


A quick history lesson will suffice. Rising federal debt rose in the 1970s and the 1980s to the point that Nigeria was unable to finance the servicing of its public debt. Nigeria’s debt burden had serious consequences on the economy and the welfare of the citizens because external debt servicing crowds out government expenditure on socio-economic development and poverty alleviation.


It was in 2006 that the Federal Government exited the Paris Club through an agreement that hinged on Nigeria implementing an IMF-monitored economic reform programme and a debt reduction under the Naples term – a form of debt relief for heavily indebted poor countries in which the present value of payments is reduced by up to two-thirds – and debt buy–back at a market-related discount on the remaining eligible debts after reduction. It was expected that Nigeria’s exit from the Paris Club would free up revenue for socio-economic development and lead to poverty reduction. But the reality today is that we are going back to where we were and we are creating problems for the future to come, all over again.


The overall public debt is the total debt accrued by federal, states, and the FCT from local and international lenders. As at March 2021, Nigeria’s total public debt has hit N33.1 trillion, accumulating borrowings from past governments. Data from the Debt Management Office (DMO) also shows that the federal government debt (domestic and external debt) moved from N3.55 trillion in 1999 to N26.91 trillion at the end of March 2021. A 658% increase in debt from 1999 till 2021 (21 years) is huge and we should be worried.


International organizations like the World Bank, the International Monetary Fund, and the World Trade Organization are worried about the pace we are going with our borrowing. Despite different voices calling on the government to halt borrowing and concentrate on other means of raising funds for the infrastructure needs of the country, President Buhari’s administration has paid no heed and has been responsible for some more increase to Nigeria’s total public debt. Curiously enough, no one sees anything wrong with this.


In an analysis done by StatiSense, Nigeria external debt profile under Buhari (as of March 2015) stood at $9.46billion and by March 2016, an additional $1.73billion has been borrowed within a year which increased the debt burden to $11.19 billion, which is 18% in one year. In the same vein, the debt burden stood at $13.81billion, $22.61billion, $25.61billion and $27.67billion as of March 2017, 2018, 2019 and 2020 respectively. Overall, the Buhari-led government has had an accumulated debt of N17.06 trillion as of March 2021, using the $1=N381 exchange rate. This represents a 193 per cent increase from when he was elected president in 2015.


Furthermore, StatiSense reported that the domestic debt profile starting from March 2015 stood at N8.51 trillion. As of March 2016, it increased to N9.97 trillion. In the same vein, the debt burden for the following years stood at N11.97 trillion, N12.58 trillion, N13.11 trillion and N14.53 trillion in March 2017, 2018, 2019 and 2020 respectively. Just as the external debt, these trends show that Nigeria’s domestic debt increased by approximately 71% in five years. These analyses and reports from StatiSense attest to the severity of Nigeria’s external debt overhang which has continued to hamper economic growth and worsen its balance-of-payments (BOP) position.


The Federal government’s debt is not the only debt that should worry Nigerians. State governments are equally guilty. The debt of states has risen sharply in the last five years – reflecting the deterioration of the states’ fiscal situation. The states have contributed N4.1trillion to Nigeria’s total debt with states such as Lagos, Rivers and Delta contributing 10.8%, 6.5%, and 5.6% respectively to the total states’ debt – according to the latest figures released by the Debt Management Office.


In light of the recent debt-servicing difficulties that Nigeria has experienced, there is a need for stakeholders and policymakers to develop an operational framework to help achieve a good debt management policy. When such a framework is in place, it would then be possible to estimate and forecast the level of debt and debt-servicing needs. This will help our system against likely debt problems for which appropriate policy action can be taken.


Finally, if the acquisition of additional foreign debt increases the debt servicing burden, then it increases the country’s capacity to bear the burden. Such an acquisition becomes undesirable and the situation must be reversed through export expansion. If the export is not expanded, more borrowing will be necessitated for servicing debt and external debt will pile up above the country’s capacity.


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