Heartache over soaring debt servicing cost

June 20, 2019

Nigeria spends more than 50 per cent of her revenue on debt servicing, according to the African Development Bank (AfDB). This, experts warn, is clipping investors’ wings by dampening their appetite to inject capital into the country to reflate the economy. It also heightened the burden on Nigeria’s already fiscally and growth-constrained economy. This has prompted calls on President Muhammadu Buhari and his soon-to-be-constituted economic management team to apply caution to avoid plunging the country into another debt overhang. Assistant Editor CHIKODI OKEREOCHA reports.

If there  is one thing that will gladden the hearts of Nigerians as President Muhammadu Buhari settles down for business in his second term in office, its most probably that he and members of his soon-to-be-constituted economic management team halt the increasing cost of servicing the country’s debt.

With Nigeria spending over 50 per cent of her revenue on debt servicing, according to the African Development Bank (AfDB), such collective charge on the administration has no doubt, become necessary to avoid plunging the country into another debt overhang, with its attendant unsavoury consequences on the economy and welfare of Nigerians.

The AfDB, last week, drew the attention of Nigerians and the authorities to the fact that over 50 per cent of the country’s revenue was being spent on debt servicing. “In Nigeria, about half of the revenue (50%) is used to service external debt…..,” the continent’s premier development finance institution said in its “West Africa Economic Outlook 2019.”

The bank was emphatic that “In a country where only six per cent of Gross Domestic Product (GDP) is collected in revenue, the high burden of debt service is a major concern.” It added that the increase has heightened the fiscal burden in an already fiscally and growth-constrained environment, raising concerns regarding the sustainability of external debt.

Read Also: APC kicks as Ladoja accuses Ajimobi of N68b debt

Giving more details, the AfDB, in its economic outlook for the sub-region, said the average revenue spent by West African countries on external debt servicing is 17 per cent, which is high.It, however, added that with the increasing domestic debt burden, the percentage of revenues spent on debt servicing in Nigeria was even higher.

The bank said even though Nigeria’s debt burden had increased by as much as 128 per cent in the last eight years, her debt to GDP remained low. The low debt-to-GDP ratio notwithstanding, the problem with Nigeria’s increasing debt burden, the AfDB noted, was the high proportion of revenue spent on debt servicing.

Comparing Nigeria’s with other West African countries, the b1ank said Cape Verde had the highest external debt-to-GDP ratio in 2018, an estimated 103 per cent, followed by Senegal, Niger, and Sierra Leone.

Liberia had the highest rate of debt accumulation between 2010 and 2018, at 329 per cent, followed by Nigeria at 128 per cent. “Despite the increase, Nigeria still has one of the lowest external debt-to-GDP ratios, at 15.2 per cent,” it said.

Why Nigeria’s outlook is unsettling

The AfDB said that for countries moving from low-income status to middle-income status such as Nigeria, the possibility of accessing concessional debt or increasing the proportion of grants appeared remote.

The bank said their strategy should, therefore, be to contract debt of longer maturities and favourable terms, including longer grace periods that coincided with the gestation of the projects that the debt financed.

This, the AfDB added, would ensure that debt was self-financing and allowed countries to avoid a debt overhang. And this is the crux of the matter, because to economic and financial experts, the fear of another debt overhang is the beginning of wisdom.

Although, the authorities, including the Debt Management Office (DMO), the Federal Ministry of Finance, and the former Minister of Budget & National Planning, Senator Udoma Udo Udoma, had consistently argued that Nigeria still has enough head-room for more borrowing on the basis of its debt-to-GDP ratio, most industry analysts are not swayed.

Many of them have kicked their heels in, insisting that caution should be the watchword. For instance, the former Rivers State Chairman of Trade Union Congress of Nigeria (TUC), Comrade Chika Onuegbu, charged Buhari’s administration to review the country’s borrowings, noting that argument that the borrowings were still within sustainable threshold was untenable.

Onuegbu told The Nation that “This is because government uses the debt-to-GDP level, which, according to him, does not apply to Nigeria. Indeed, while Nigeria may still have enough head-room for more borrowing on the basis of its debt-to-GDP ratio, experts say that the scenario is different when the debt profile is measured against debt servicing-to-revenue ratio.

Onuegbu, therefore, said government must do something about its rather huge borrowings, pointing out that the debt service obligation of about N2.4 trillion in the 2019 budget was too high.

The trade unionist justified his position thus:”In the case of Nigeria, the resources for the repayment of loans actually come from government revenue, which is mainly oil. If the oil price goes down, what is the capacity of government to service the loans?”

Onuegbu is right. The International Monetary Fund (IMF’s) recent stress test on Nigeria’s debt ratios, observed that public and external debt are vulnerable to oil price shocks and currency volatility.

The IMF said Nigeria’s rising external debt to export ratio suggests that total debt is growing faster than the economy’s major source of external income, indicating that the country may have problems meeting its debt obligations in the future.

Financial Times recently reported that the high cost of servicing government debt in Nigeria was dampening foreign investors’ appetite to inject capital into the country. It noted that many investors continued to be willing lenders, despite signs that their money might not always have been put to the most productive use.

Indeed, fears over Nigeria’s rising debt service cost are real. This is so because the 2019 Appropriation Bill of N8.916 trillion has an overall budget deficit proposal of N1.859 trillion, with the Federal Government saying it would finance the short fall in revenue mainly by domestic and foreign borrowing, which is put at a total of N1.649 trillion.

The balance of N210 billion budget deficits is expected to be financed from the privatisation proceeds of the sale of government-owned enterprises. Government’s plan to sustain borrowing this fiscal year will push up Nigeria’s total debt to N24 trillion.

At N22.4 trillion total debt currently, the Debt Servicing-to-Revenue Ratio (DSRR) is put at about 66 percent, with experts noting that additional borrowing is expected to push the ratio beyond 70 per cent.

Amidst this pressure, the Federal Government is required to increase its debt servicing obligation to N2.4 trillion in 2019, from N2.0 trillion in 2018. Expectedly, the soaring debt servicing obligation has prompted fears that it could compromise Nigeria’s rate of development.

Onuegbu and indeed, other concerned experts and operators, therefore, warn that if caution was not applied, Nigeria may return to a highly indebted country as was the situation before the 2005 debt relief granted it by the Paris Club.

Recall that it took extensive and painstaking economic diplomacy by the Olusegun Obasanjo administration to secure a debt forgiveness deal from the Paris Club. That was in 2005. But the deal was not a walk in the pack, as Nigeria had to cough up $12 billion from her oil surpluses to secure an $18 billion debt relief to exit the $30 billion Paris Club debt trap.

With this episode still fresh in the minds of not a few Nigerians, it is easy to see why the AfDB’s latest report that over 50 per cent of Nigeria’s revenue is spent on debt servicing pushed many people to the panic mode, fearing that Nigeria may be on the path to another debt crisis, with its attendant consequences.

However, those habouring fears over government’s borrowing binge concede that there is nothing wrong in borrowing. According to them, there is need for government to borrow to build infrastructure and boost economic growth, for instance. The snag, however, is the utilisation of the borrowed funds.

The preponderance of opinion is that government borrows to finance mostly recurrent expenditure instead of capital expenditure, which, according to Onuegbu, “Matters more to private sector operators who need supportive infrastructure to operate optimally.”

The Managing Partner of Finexem, a Paris-based financial consulting firm, Mr. Andrew Roche, expressed worry that the Nigerian government had been using borrowed cash to patch up holes in budgets, rather than investing in infrastructure or industry, or in efforts to diversify the economy from a heavy dependence on oil.

This must be why operators are clamouring for efficient utilisation of borrowed funds as well as drastic reduction of government spending. They note that rather than spending tax-payers’ money on recurrent expenditure, government should focus on capital spending to productive projects.

Some of them include building more and expanding existing international airports to facilitate trade, renovating strategic roads that connect trading zones and investing heavily in mass transport schemes, among others. If properly implemented, these projects will have a multi-plier effect on the economy and eventually boost economic growth.

Will Buhari and his yet-to be-inaugurated cabinet hit the ground running by devising other innovative ways of funding infrastructure and save Nigeria the trouble of rising debt services that may ultimately, push the country into a debt trap?

To begin with, an Economist, Mr. Godwin Anono, said Buhari should promptly name his ministers, to send positive signals to foreign investors and create economic certainty in the country.

He said there should be no room for any vacuum; that prompt appointment of members of his cabinet will show that the government wants to consolidate on its policies and will erase the impression of the past that the government is too slow.

A new economic management team is expected to seriously work on the Public-Private Partnership (PPP) infrastructure development model. Experts also expect the team to revisit and strengthen the concessioning option while ensuring that all memorandums of understanding signed with development partners are respected.

Anono, who is also the President, Standard Shareholders Association of Nigeria, added that Buhari’s second term administration should work assiduously to fix the nation’s power crisis and that the enhancement of the country’s network of roads should be tackled through more PPP efforts.

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