Last week, President Muhammadu Buhari of Nigeria appealed to the United Nations General Assembly to forgive the Nation’s humongous debt. In his own words, “there is an urgent need to consider expansion and extension of the Debt Service Suspension Initiative to include all Developing, Least Developed Countries and Small Island Developing States facing fiscal and liquidity challenges”. Multilateral financiers had introduced various debt forgiveness, suspension, and restructuring programmes in the face of the COVID-19 pandemic to ease the burden of debt servicing. However, Nigeria was not fortunate enough to get pulled into the various debt forgiveness programme.
There are some cogent reasons why multilateral financiers did not embrace Nigeria’s debt forgiveness plea when nearby Ghana has enjoyed suspension of debt servicing, fresh grant, and different COVID-19 related loans. First, Nigeria’s debt has been partly productive. In my view, for a debt to be productive it should have about 85-95% of the borrowing invested in high-yield capital projects; it should turn out a 2.5x return over the amortization span; it should create a long term infrastructure that outlives the life of the debt. Based on these three criteria, Nigeria’s debt is partly productive. Second, Nigeria’s debts are graduating faster. Nigeria’s total public debt stock rose to N35.47tn as of June 30, 2021, from N33.11tn as of March 31, 2021, and debt-to-GDP surged to 21.92% from 21.13% over the corresponding period. To accommodate the borrowings, the federal government successfully got approval to raise its debt-to-GDP ceiling to 40%, when in fact, the focus should have been on the debt service-to-revenue ratio. Third, requests for fresh loans have been coming in at a fast rate. The presidency made a fresh request for a US$4bn and €710mn to fund infrastructural programmes in the Nigeria Economic Sustainability Plan. These debt requests have been coming in at a fast pace, which poses a serious concern on repayment.
To the crux of the matter, should Nigeria’s debt be forgiven? Well, multilateral lenders are best placed to answer this question, but if the disposition of these lenders is anything to consider, they may not consider Nigeria’s plea for debt forgiveness. Nonetheless, the Nigerian government has a critical need to reduce its debt service as the debt service-to-revenue ratio has consistently scaled above 90% in recent times. This means over 90% of the federal government retained revenue goes to debt servicing; hence, the government is financing its operational expenses through short-term financing, particularly the CBN’s ways and means financing. Reports showed that the government owes the CBN about N16bn in short-term overdraft. While this is a local currency debt and can be easily cleared, the impact can be reflationary.
The key message is that Nigeria needs debt forgiveness at this time, but the fundamentals are not supportive. The federal government must signal its readiness for debt productivity on one hand, and debt responsibility on the other hand to multilateral lenders. By the way, instead of pushing for outright debt forgiveness, a debt suspension or a debt rescheduling may be appropriate. There has to be an increase in the level of provision for debt service and principal repayment through the sinking fund. It is also important to space the request for new borrowings and more importantly, invest the borrowings in major capital projects. These projects should be 100% implemented and monitored to confirm revenue generation. The federal government can also learn from other countries that are managing their debt levels efficiently.
Written by Michael Ogunremi