Opinion: Nigeria: Sliding to a debt trap – By BABATOPE BABALOBI
There are heightening concerns over the geometric rise of Nigeria’s public debts, despite assurances from Minister of Finance, Budget and National Planning, Zainab Ahmed that there is no cause for alarm.
The crux of the matter is that Nigeria’s total public debt has almost risen to pre-2005 levels when through an innovative debt buy back agreement, the Obasanjo administration reduced the nation’s debt commitments to the Paris Club, from $30b to less than $5b. Nigeria’s total public debt is rising to the roof tops again, estimated to be N25.7 trillion or $83.6m as of June 30, 2019. It was N12.1trillion or $63.8m in June 30, 2015, implying that it doubled within past four years.
Public debts is the amount a country owns to lenders in form of bonds and securities. Every individual, family, organisation, or public entity secures loans from time to time to finance its activities, when internal income is inadequate to meet financial obligations; and the debtor makes interest and principal payments at agreed dates. Sources of Nigeria’s debt according to Central Bank of Nigeria include Paris Club of creditors, London Club of creditors, multilateral creditors, promissory note creditors (these are refinanced uninsured trade arrears), bilateral and Private sector creditors.
Debts could be a benefit or burden depending on how it is managed or mismanaged. Excessive and unproductive spending leads to huge, unsustainable, internal or external debts which is antithetical to economic growth, as foreign earnings that would have otherwise been used for investment is diverted to debt repayment and servicing. Unproductive utilisation of debts invariably makes repayment difficult.
What is the history of public debts in Nigeria? Nigeria took its first post-independence loan -US$13.1 million from the Italian government in 1964, for the construction of the Niger dam; since, Nigeria has become a habitual borrower, resulting in high soaring debt portfolio like the Eagle.
Respite came in 2005/2006, when the Paris club, an informal group of money lenders, formed in 1956 with a Secretariat in Paris, granted Nigeria a $18m debt relief package, out of Nigeria’s $30.84b debt. Nigeria paid the balance $12.4 billion debt stock in three tranches through an innovative discounted buy back agreement and exited the Paris club on April 21, 2006.
Nigeria’s post-Paris Club external debts went down from $35m to less than $5m as of June 30, 2006, while debt service payment declined from $1.7 billion before the Paris club exit to $700 million. 14 years later, the gains of the Paris relief seem to have been filtered away and Nigeria seems to be entering another ‘one chance’ debt trap.
There are, however, discordant tunes on Nigeria’s debt profile. Nigeria born Deputy Secretary-General of the United Nations (UN) Ms Amina Mohammed, lamented few months ago: ‘We are now back again, in my country, the level of debt is worrying’.Also, Godwin Emefiele, Governor of Central Bank of Nigeria, was quoted early this year as warning that Nigeria’s external borrowing and increasing debt level is ‘fast be approaching the pre-2005 Paris Club level’
Minister of Finance, Budget and National Planning, Ms Zainab Ahmed holds a contrary view. According to her, Nigeria’s N24trillion debt is ‘reasonable and not too high’. Dismissing critics as ‘insensitive’ during the 2020 budget presentation, Minister Zainab said Nigeria’s problem is not in debt level but how to raise revenue as an alternative to borrowings.
Her words: ‘There is a lot of insensitivity around the level of our debt. I want to restate that our debt is not too high; what we have is a revenue problem. Our debt is still very much within a reasonable fiscal limit. In fact, amongst our comparative countries, we are the least in terms of borrowing’
The Minister ‘s assertion is hinged on Nigeria’s low debt to GDP ratio which is 17.5% as of December 2018. The debt-to-GDP ratio is a financial instrument for measuring a country’s financial health. It could be low or high.
How valid is the Honourable Minister’s assertion? Firstly, by insisting that Nigeria’s problem is a revenue problem not a debt problem, the Honourable Minister ignored the history of Nigeria’s public debts. Nigeria fell into a debt trap in the past due to fall in oil prices in 1982 and the outright refusal of the military governments of the 1983-1998 to pay their debt repayment commitments to the Paris club; rescheduling it on four occasions- 1986, 1989, 1991 and 2000.
While it is true that Nigeria has a revenue problem due to its oil mono economy, everyone knows that export diversification cannot be achieved overnight. Neither is the price of crude under the control of the Nigerian government. The average price of Crude oil per barrel in 2019 was $56.2, down from the 2014 average of $93.17. Tradingeconomists.com, a web-based group that monitors crude oil prices, project that oil prices will further dip to a little below $50 in 2020.
In effect, a revenue problem created the first debt trap. Nigeria has always experienced a revenue problem (apart from occasional oil windfalls), and no government has been able to solve this. Nigeria is presently having another revenue problem, that may slide us to a second debt trap.
Second, debt to GDP ratio, a mere statistical expression, does not tell the full story of a nation’s financial health. We all know Statistics are like miniskirts, what they show is revealing, what they hide is more revealing. A low or high debt to GDP ratio does not necessarily mean good or bad financial health. The debt to GDP ratios of Egypt and South Africa is a high 90.5% and 55% respectively, and their economies may be stronger than Nigeria’s. A high debt to GDP ratio does not necessarily indicate a debt crisis, if the debts are largely domestic, and the economy is growing fast enough to repay the debts. A case in question is Japan, the World’s greatest debtor, yet has not been declared debt ridden as the debts are largely domestic, and the economy is strong, the third largest in the world.
Third, Nigeria is walking into a death trap due to the huge amount it incurs on servicing its mounting debts. The World Bank defines total debt service as the sum of principal repayments and interest actually paid in foreign currency, goods, or services on long-term debt, interest paid on short-term debt, and repayments (repurchases and charges).
Nigeria spent N2,502,822,000 on debt servicing in 2016. This represented 61.59% of its revenues, meaning N61 naira was spent on servicing debts for every 100 naira earned.
Nigeria presently spends more money servicing debts that in educating or providing quality health care to her citizens. Out of a proposed budget of N10.3 trillion for 2020, a quarter N2.45 trillion will be spent in debts servicing; while N1.043 trillion (less than half of the fund for debt servicing) is the total capital allocations for key infrastructural projects in the following key sectors: Works and Housing N259.2billion; Power N127.6billion; Transportation N123billion; Universal Basic Education: N162billion; and Health 90.9billion, Agriculture and Rural Development- 79.79billon; Water resources- 78.3Billion; Transport- 123billion;. Total capital budget for all these Federal Ministries is N1.043 trillion.
IMF projected that Nigeria’s debt to GDP ratio may rise to36% by 2024 and interest payments could make up 74.6% of revenue. This is a debt trap as it is not sustainable.
Fourth, the nature and character of Nigeria’s debt gives cause for concern. Nigeria’s debt is mostly made up of commercial debts and Eurobonds, vulnerable to external shocks such as variations in oil prices and currency fluctuations. Also, some of the recent debts were incurred to refinance repayments- (treasury bills that have a short tenor). Nigeria also has a few liabilities prominent of which is the $9billlion awarded to Process and Industrial Development (P and ID) by a British Court, still a subject of litigation. Moreover, Nigeria continues to borrow to finance its budget deficit. The 2020 proposed budget has a deficit of N2.175 trillion to be financed mainly by borrowing N1.594 trillion.
Fifth, the Nigerian factor has hindered the nation from deriving dividends from its past borrowings. An official of the Debt Management Office (DMO), Mr Yakubu Aliyu in a paper titled: ‘Debt restructuring, Nigeria’s experience’, presented to Commonwealth Secretariat, London, said Nigeria’s past borrowings were largely spent on ‘wasteful consumption, white elephant projects, and uneconomic projects’, lamenting that ‘of 63 projects undertaken in the 1980s for which US$2.6 billion was borrowed only one project was viable’
Finally, Nigeria’s Excess Crude Account (ECA) is depleting fast. The ECA stood at $34b when Paris Club granted debt relief to Nigeria, but depleted to $183m in March 2019. Nigeria Natural Resource Charter (NNRC), has issued a warning that unless this is checked, Nigeria is on the precipice of another economic recession.
How do we avoid another debt trap as a people and as a nation? The Federal Government must avoid grandstanding, accept the stark reality, admit there is a debt trap along the walkway and a debt crisis in the offing. The next step is to introduce a debt cap on further federal and state government borrowings and institute a mechanism for productive use of future unavoidable borrowings. Nigeria’s federal and state governments must also stop going to wasteful and wild parties on borrowed robes (debts), like prodigal children. Looting the treasury through slush funds such as Designate and similar security votes accessed by the all-powerful Governors, should stop.
Importantly, Government should summon the political will to institute a comprehensive audit of all public debts, to determine their misapplication or mismanagement, identify culprits, and recover looted public debts. Finally, the revenue problem needs to be frontally addressed using a top down approach, by enforcing extant tax laws on the Nigeria’s rich and super rich, rather than a bottom up approach through increases in Value Added (VAT) tax which may hurt mostly the low-income bracket.
Babatope Babalobi [email protected] is a Doctorate researcher, Department of Health, University of Bath, UK