Of Nigeria's Public Debt, Swimming and Drowning
Up to the end of 2019, there was no consensus on the sustainability of Nigeria's public debt. The fiscal authorities had continued to insist that the country was well within its safe borrowing limit because Nigeria's debt-to-GDP ratio, at 21 per cent at the end of last year, was quite low. For credence, they would marshal the fact that many comparator countries have much higher figures on the popular debt metric.
But many local and international analysts, including the International Monetary Fund (IMF), believed that the country's debt profile had reached alarming levels, going by a different metric: the proportion of government's annual revenue that is used to repay the principals and interests on its debts. By 2019, this ratio had risen to over 60 per cent.
The huge debt service outlay is all the more disconcerting given that revenue from crude oil export, which has over time accounted for about 70 per cent of government's total revenue, is susceptible to downward risk. Indeed, the variables for sustained oil price slump – supply glut and negative demand shock – have converged since early this year, as Russia and Saudi Arabia over-supplied the market and as demand plunged as the world went into the Great Lockdown to contain the spread of the Covid-19 pandemic.
The convergence of risks has had a devasting impact on Nigeria's fiscal plan for 2020. From its monthly average price of $67.31 per barrel (/bl) in December 2019, the Brent crude price crashed to $18.38/bl in April 2020, which was well below the country's budgetary benchmark of $30/bl – the revised benchmark announced a month earlier from $57/bl set in the approved budget for 2020. The economic shutdown attendant to Covid-19 has also dampened the outlook of government's nonoil revenue for the year, as the GDP growth rate, adjusted for inflation, is forecasted by the IMF at -3.4 per cent.
Faced with this brutal reality, the government may have tacitly admitted to debt distress. In early April, Nigeria joined other African countries in asking for debt relief from its bilateral, multilateral and commercial creditors. A few days earlier, President Muhammadu Buhari directed Nigerian development finance institutions to restructure their maturing obligations to their creditors.
It is arguable that the simultaneity of the negative economic effects of Covid-19 and the oil supply glut constitute a genuine black swan event to undermine government's analysis of its debt sustainability. But any one of the two events could possibly have produced their combined effects on oil prices and the economy. The Brent crude crashed to below $20/bl during the 2008-9 global financial crisis as it did this past April. Also, since the spread of SARS from China to 29 countries between 2002 – 2004, a coronavirus pandemic had not only become probable, the science for its containment was known to include lockdown.
In the same vein, the risk of oversupply has for long pervaded the outlook of the oil market. The new normal of China's slower economic growth has meant that oil demand growth is likely to lag growth in supply. Such disequilibrium becomes the more likely given the transition in the energy market towards renewable energy.
On the supply side, the U.S. shale oil producers were expected to continue with their aggressive supply strategies as long as possible. And precisely because of the aforementioned demand-side factors, many oil producers are in races to diversify their economies with the aid of oil revenue. This can accentuate the risk of a supply surfeit, in the age of hyper geopolitical rivalry.
By not factoring these scenarios, the debt sustainability analysis of the government is either too risk tolerant or unaware of the risks. The analysis had also conveniently overlooked the importance of fiscal savings to debt sustainability for countries that depend on very volatile sources for export revenue.
The debate of Nigeria's sovereign debt sustainability is often quickly reduced to whether there is anything wrong with borrowing. To this, the languorous answer is that there is nothing wrong with borrowing, provided the loans are invested in infrastructure projects. Investments in physical infrastructure is expected to always generate economic-growth return.
But how private sector debits are invested do not altogether determine their sustainability. Companies whose cashflows are substantially tied to repayment of the principals and interests on their loans risk getting into a debt spiral by borrowing more to meet their cash needs.
This risk is more acute with public debts that are often used to finance various items of budgetary deficits that don't even generate direct financial returns. Indeed, this has been the reality with the Buhari administration, whose relatively high nondebt-recurrent expenditures are being partly funded by debt.
The debt level, not only what debt is invested in, is key for debt sustainability. A high current debt threshold could increase the interest rates chargeable for new debts. The percentage of revenue that is used to service the aggregate debt is also important. Borrowing so much so quickly can be reckless. This has been a valid criticism of the current fiscal regime that has increased the national debt by over 150 per cent in nearly five years.
I have previously argued that Nigeria does not meet the conditions for using infrastructure investments to create substantial local jobs and deliver economic growth. Apart from funding the ongoing major rail, airport and dam projects with external borrowing, the projects are also being delivered with foreign expertise, foreign technologies and substantial foreign labour. The economic multiplier effects of our so-called infrastructure investment belong to our provider countries.
In the advent of Covid-19, these projects are set to miss their delivery dates. Therefore, the economic impacts of the projects are also set to be delayed. Such risks are ameliorated if Nigeria is able to substantially provide the other inputs for the projects, even if the financing is external.
Swimming can very quickly lead to drowning, should one underestimate the depth of the river or pool (debt limit), overestimate one's ability to swim (debt service outlay), misjudge the water current, which can change rapidly in open waters (revenue outlook), and having no life guards (fiscal buffers). As the economy is set to go into recession in Q3 2020, conventional wisdom would recommend additional borrowing for infrastructure development to reflate the economy, but this will only deepen the country's debt spiral.
Nigeria has been in a fiscal emergency for over five years with no end in sight. While it may be counter-intuitive, the country needs to start to rebuild savings buffers to counter its fiscal vulnerabilities. The Buhari administration needs to broaden its view of the role of the private sector from just financing the fiscal deficits to more active involvement in directly investing in the country's infrastructural development. The government also needs to increase its investment in the productive skills and capacities of Nigerians.