At the end of 2019, the ratio of total public debt to GDP in Nigeria was 38.4% (states and federal government combined). No doubt, this is alarming and poses a significant future risk for the Nigerian economy. The obvious implication is that Nigeria’s fiscal revenue is stressed by huge debt servicing. in 2019, Nigeria paid N1.69 trillion in domestic debt service, USD1.3 million in external debt service, and earned N10.26 trillion as total federally collected revenue. This means 20.67% of Nigeria’s earning was used to service debts. With the exchange rate fluctuating, this ratio will likely increase. More so, the federal government took some ‘fresh’ loans at the inception of the COVID-19 pandemic. All these points to the fact that Nigeria is bedridden with debts and needs to restructure these debts sooner to avoid a debt overhang.
To understand how to manage Nigeria’s debt, an understanding of the structure of Nigeria’s debt is important. In terms of the total debt stock, the federal government holds about 79% of total public debt. Drilling down to domestic versus external debts, Nigeria’s biggest external debts are from Eurobonds (USD10.9 billion), World Bank Group (USD10.1 billion), and Exim Bank of China (USD3.2 billion). These three sources combined are worth N7.9 trillion at the 2019 average NAFEX rate. The problem is not with the quantum of debt, but the high rates charged on these loans. These rates are stifling and crowding out private investment.
From an external debt perspective, what does Nigeria need to do? Quite right, the debt portfolio is diversified as there are many lenders. However, the rates on these loans are not well dispersed. The federal government particularly must look for lower rates on debts. One of the ways to achieve this is when Nigeria as a country has a better credit rating. This does not happen overnight. The federal government (FG) must repay its debt faithfully, make productive use of the loans collected, and generally improve the economy to get a better credit rating. With this, the FG can sell its Eurobonds at lower yields and borrow at lower rates to cut down on grim debt servicing.
In a different twist, domestic borrowings by states and the federal government in Nigeria hit N18.4 trillion by the end of 2019. About 78% of this is held by the federal government. The reason why the federal government is more indebted than 36 states combined is that lenders are aware that they can service their debt better. Emphasizing on the federal government, the top three domestic debts were from FGN bonds (N10.5 trillion), Treasury Bills (N2.7 trillion) and Treasury Bonds (N125.9 billion). There is the market consensus that domestic debts are more expensive compared to external debts and this because of inflation and higher risk premium. Reducing the volume of FGN bonds is important but this may be at the expense of capital market deepening.
How can Nigeria manage its debt stock?
First, the annual budget deficit needs to be checked. The government is fond of borrowing because it set over a realistic expenditure estimate in the budget. For 2020, budgeted expenditure topped N10 trillion. There should be an underlying rule that ensures that MDAs submitting their expenditure budget should keep their estimated figures within 80% – 90% of the revenue they estimate to earn. This way, there can be smaller fiscal deficits.
Apart from exploring cheaper sources of external debt, the government must ply the route of debt service rescheduling and restructuring. They should also renegotiate some of the terms on long term external debts. Besides, there should be a limit on the number of new borrowings per year. In my opinion, borrowings by the FG and states government should not exceed 40% to 60% of capital expenditure and the funds should only be used for capital expenditure. the habit of borrowing to finance recurrent spending should be halted.
Debt servicing should be programmed to derive from the proceeds of projects financed by borrowings. This means there must be a productive use of borrowed funds. In this case, there should be an audit of debts collected and the audit report published to allow for transparency and accountability.
The federal government should also explore inter-country borrowings at lower rates instead of the current bias to financial institutions. There are developed countries that can supply loans to the government at lower rates or for a crude oil exchange. A benefit of this is that Nigeria can gain more from its crude oil instead of selling them for pennies when crude oil price falls.
Lastly, in the case of external debt, and to avoid the challenges associated with exchange rate depreciation since payments are in foreign currencies, the government should use derivatives like currency forwards, swaps and options to hedge FX risk. They can also use a credit default swap to hedge credit risk. However, derivatives should be adopted with caution because it has its own risk
Written and edited by Michael Ogunremi
A well- researched write -up. I am proud of you. I am not disappointed. You are limitless.
Thank you very much sir