It is in the wise book of proverbs that the popular phrase emerges “he who goes a-borrowing, goes a-sorrowing.” Concerns have been heightened on whether Nigeria is borrowing its way into trouble since the National Bureau of Statistics (NBS) released data on the country’s domestic and external debts figures on 19 September.
The significant rise in both the domestic and external debt stock of the country has raised concerns. The country’s total debt stock as at June 2017 stood at N19.64 trillion, which was equivalent of US$64.52 billion using the official exchange rate of N305 to US$1. A breakdown of the debt stock shows that external debts, owed by both the federal government and states stood at US$15.05 billion while domestic debts owed by both tiers of government was N15.03 trillion or approximately US$49.46 billion.
Just taking Nigeria’s debt stock alone, the country’s debt position would not look like much of a problem especially if we are taking the standard measurement of debt sustainability, which is debt to GDP ratio. As a percentage of GDP, Nigeria’s external debts just stand at about 15.8 percent, which is still below the threshold of 19 percent set by the Debt Management Office (DMO) for the country.
However, the significant increase in Nigeria’s debt stock in one year remains a cause for concern that indicates that this self-set threshold set by the DMO could easily be breached if current borrowing trends continue. Between December 2016 and the half year of 2017, Nigeria’s total external debt stock rose 32 percent from US$11.41 billion to US$15 billion. The only other time Nigeria’s external debt rose at that fast pace in the last five years was between 2012 and 2013 when the total debt stock rose 55 percent from US$5.6 billion to US$8.8 billion. Between 2013 and half year 2017, Nigeria has almost doubled its external debt stock.
The country is also growing its domestic borrowing at a similar pace. Net domestic debt of N15 trillion as at June 2017 is 43 percent or N4.5 trillion higher than the total domestic debt of N10.5 trillion in December 2015. The fast pace growth in both domestic and external debts could be explained by the fact that while the government has seen a sharp collapse in revenues largely due to lower oil prices and lower production brought about by the crisis in the Niger Delta, government expenditure has actually gone up within the same period.
Lower revenues mean that the government has had to support its expanded expenditure with increased borrowing, mainly by the issuance of bonds and treasury bills in the domestic market and recently Eurobonds in the international markets. The African Development Bank has also chipped in with a US$1 billion loan, of which US$600 million has already been disbursed to the government.
But the question that worries most people is if this increased borrowing has taken us closer to a debt crisis. While the country’s debt to GDP ratio is still within acceptable country, regional and international thresholds for the size of Nigerian economy, the risk lies in the rising debt service burden. The International Monetary Fund (IMF) in its March 2017 Article IV commentary on Nigeria raised concerns about the country’s interest payments to revenue ratio which the IMF put at an all-time high of 66 percent. This basically means that Nigeria is spending an average of N66 of every N100 revenue, servicing debts rather than investing it in infrastructure.
The country’s revenue shortfalls in 2016 could be said to have been exceptional in that not only were crude oil prices low, but also the country had a major crisis in the Niger Delta to deal with, which cut crude oil production, the major source of government revenues while the contraction of the economy also impacted on non-oil revenue collection.
Nonetheless, Nigeria’s revenue outlook remains highly challenging even in 2017. Even though crude oil prices and production have picked up significantly this year, the government’s revenues have still remained far below expectation. Data from the budget office from first quarter 2017 budget implementation report shows actual revenues fell short of target revenues by as much as 70 percent within the period. While the Federal Government had targeted revenues of N1.271 trillion in the first three months of 2017 ending March, actual revenues that it received stood at just N380 billion, a shortfall of N891 billion.
Not surprisingly, the Central Bank of Nigeria (CBN) disclosed at the conclusion of its Monetary Policy Committee (MPC) in meeting in June that the FG had already incurred a total deficit of N2.5 trillion as at half year 2017. This has already surpassed the N2.2 trillion deficit it projected to incur for the whole of 2017. If the trend of borrowing in the first half of the year is not reversed, then total debt stock by the end of the year will likely hit about N24 trillion, which will be about 19 percent of the country’s GDP, the threshold we have set for ourselves not to exceed in expanding the country’s debts.
There is actually an immediate solution to plugging the revenue shortfall which has led to the spike in government borrowing. Increase revenues through higher taxation or improved collection or both. But this is usually a longer term solution and the revenue shortfall is an immediate challenge that really needs urgent solution or the country risks running into a debt crisis.
The alternative, as has been suggested several times, is for the government to start selling assets, adopt more public private sector partnerships in executing capital projects and outright concessioning of commercially viable government assets. Initial indications were that the President Buhari led administration was not interested in any of these solutions, which perhaps resulted in this high debt accumulation in the last two years in a bid to execute projects from government’s lean purse.
But current indications show that the government is having a change of thinking. The return of toll gates is back on the table as the government seeks to improve road infrastructure without necessary putting its hands into its dwindling revenues. The country’s airports are also up for concessioning while PPP is being used for some critical road infrastructure.
All these initiatives would reduce pressure on government’s dwindling revenues and are tentative steps towards a more private sector focused thinking on the part of government. Hopefully, these initiatives would be ramped up on time before the nation’s debt burden becomes a load too heavy to carry.
Anthony Osae-Brown
