On Raising More Debts
On a micro and macro level, taking on debts is not a terrible thing to do. Data shows that businesses across the world and even developed economies have raised debts to support their developments. On the other end are countries whose excessive borrowings have resulted in debt crises, such as Greece and Venezuela. The difference lies in the ability to pay back.
As per the most recent data released by the Debt Management Office (DMO), Nigeria’s public debt stood at NGN33.11trn in Q1:2021, representing a 0.58% uptick from NGN32.92bn at the end of 2020. The domestic component of the debt was NGN20.64trn, while the remaining NGN12.47trn was from external sources, representing 37.66% of total debt. For context, in 2012, foreign debt was only 13.46% (NGN1.02trn) of the FG’s total debt stock (NGN7.55trn).
A couple of days back, the DMO announced that Nigeria successfully raised USD4bn in the Eurobond market to finance the ever-rising budget deficit, which peaked at NGN6.60trn in 2020 from NGN2.41trn in 2016. In a similar vein, the President recently wrote to the senate, seeking approval to borrow an additional USD4.05bn and EURO710m to finance specific projects and create employment in the country. However, there are concerns regarding the rising debt stock and the Government’s ability to pay back.
One measure of a nation’s solvency is its debt-to-GDP ratio. Although at 35%, Nigeria compares fair enough to other countries globally and in the African region.
Chart: Debt-to-GDP ratio
Source: Trading Economics, Meristem Research
However, the debt service to revenue ratio paints a different picture, increasing to 71.26% in 2020 from 45.42% in 2016. In other words, 71.26% of what the Government generates in revenue is channelled towards servicing debts.
As we have alluded to earlier, taking on debt is not the problem, the concern is associated with the utilization of the borrowed funds. Typically, sovereign debts used to finance revenue-generating capital projects (project tied debt) can help foster economic growth without threatening fiscal sustainability. Such project-tied loans include the Federal Government’s USD3.12bn loan intended to fund the Nigerian Railway Modernization Project, Abuja Light Rail Project Airports Terminals Expansion Project, and Rehabilitation and Upgrade of Roads. However, using debt proceeds to finance non-income generating projects might not be as efficient. Without expanding the country’s revenue stream outside of the volatile oil market, the trend is likely to remain the same- taking on more borrowings to finance old borrowings.