Bamidele Famoofo

For the umpteenth time, Nigeria has said there is no cause for alarm over her rising debt portfolio, which has increased considerably in the last five years. The argument has always been that the ratio of the country’s debt stock compared to GDP falls below the threshold of debt limit allowed by government.

The Debt Management Office, in a press release, announcing the nation’s debt profile in the first quarter of 2019, said: “The total public debt to GDP ratio was 19.03 per cent, which is within the 25 per cent debt limit imposed by the government.”

But that argument, pundits say, is not tenable as the nation undergoes a big stress to service the interest on the existing debt which they lament, currently stands above $85billion.

Paris-based sovereign debt expert, Andrew Roche, has pointed out that while the country’s debt as a proportion to GDP is a reasonable 20 percent, debt servicing costs make up fully two-thirds of retained government revenue. This, according to him, is a startlingly high figure and a datum Nigerian government goes some lengths to de-emphasise.

International rating agency, Moody’s Investors Service, in a recent report which analyses the debt situation in some African countries, confirms that interest makes up a relatively large share of total spending by Nigerian government. “Nigeria and Gabon have relatively less flexibility to cut spending; in Nigeria, we capture only spending at the federal government level, where interest makes up a relatively large share of total spending, while the relatively low degree of spending flexibility reflects past fiscal consolidation, which was skewed towards discretionary spending,” Moody’s disclosed.

A Washington-based policy expert, Ike Brannon, in a recent article published by Forbes, claimed that Nigeria’s biggest economic problem is the growing public debt. He was of

the opinion that except government acknowledges it and tackles it headlong, the future holds little hope for the country. “The issue that requires real political acceptance from Buhari’s new government – is the country’s growing public debt. Since assuming office in 2015, President Buhari’s governments have added considerably to the nation’s debt, which now exceeds $85 billion. In essence, the nation’s debt is about where it was in 2005-06, just before Nigeria benefited from massive debt relief as part of a programme coordinated by the Paris Club, IMF, World Bank and the African Development Bank. To have squandered the debt reduction in just fourteen years and have no tangible economic progress to show for it is beyond disappointing.”

Threat

Experts believe that another problem facing the country is that while most developing countries take advantage of concessionary financing from the World Bank or other international institutions, Nigeria’s debt profile is now increasingly made up of commercial debts. Its recent Eurobond issuances in London, for example, came at a relatively high yield, which makes its economy especially vulnerable to external shocks, such as a sustained drop in oil prices.

“Compounding Nigeria’s debt problem is its Nigeria’s significant contingent liabilities. Recent arbitration awards have exposed the government to billions of dollars of liability – most prominently a case involving a private contractor, Process & Industrial Developments (P&ID), whose gas processing project collapsed after the Nigerian government failed to carry out its contractual commitments. The P&ID tribunal award alone represents over $9 billion, and it owes another company another $2.3 billion over a failed hydro-power project,” Brannon said.

He claimed that evidences of Nigeria’s high debt servicing costs, along with concerns over the rule of law, were causing investors to become concerned with investments in the country’s debt.

Recently the African Development Bank expressed concerns that the Buhari administration was seeking to change the rules for the feed-in-tariff for 14 major solar projects, spooking investors. Given that fully half of its people lack access to electricity, Nigeria simply cannot afford to jeopardise future investments in power infrastructure.

“It is a mystery why these contingent liabilities and the concomitant decline in investor confidence and divestment in the country’s most critical sector are not taken more seriously in Abuja,” Brannon said.

Moody’s Investor Service said sovereign plans by most Sub-Saharan African (SSA) countries (which includes Nigeria) to consolidate their budgets to stabilise debt may not be realistic as they are now more vulnerable to potential negative economic and financing because they are in a weaker fiscal position than five years ago.

Debt Analysis

At N24.947 trillion (US$ 81.274 Billion) as at March 31, 2019, total public debt grew by 2.3 per cent when compared to the figure of N24.387 trillion (US$ 79.437 Billion) as at December 31, 2018.

The increase of N560 billion in the total public debt in Q1 2019 was accounted for largely by domestic debt, which grew by N458 billion. Increases were recorded in the domestic debt stock of the FGN, states and the FCT. External debt also increased by N101.7 billion during the same period.

In relation to the debt management strategy, the ratio of domestic to external debt stood at 68.49 per cent to 31.51 percent at the end of March 2019. The total public debt to GDP ratio was 19.03 per cent which is within the 25 percent debt limit imposed by the government.

Breakdown of Nigeria’s external debt exposure showed that multilateral and commercial borrowing stand head to head, constituting close to 88 per cent of total external debt.

Commercial debt stood at $11.17billion as at March 31, 2019 while multilateral was $11.25billion. Bilateral borrowing was only $3.19billion representing 12.47 percent of total external debt.

The commercial component of Nigeria’s burgeoning external debt showed that Eurobonds accounted for 97.3 per cent of the sub-total while Diaspora Bond accounted for the balance, which stood at about $300million as at March 31, 2019.

Nigeria has borrowed $11.25billion from the World Bank and African Development Bank groups as multilateral debt which accounted for about 44 per cent of total external debt as at March 31, 2019. The World Bank through IDA and IBRD accounted for about 90 per cent of Nigeria’s multilateral loan.

Meanwhile, China remains the largest lender to Nigeria under the commercial category with a loan of about $2.6billion from the Exim Bank of China while France (AFD) has loaned $366million to the country as at March 31, 2019. Japan (JICA), India (Exim Bank of India) and KFW of Germany lent $74.63million, $26.5million and $171.8million respectively as commercial loan to Nigeria as at end of first quarter in 2019.

Recommendations

Experts said if Nigeria did not get its put its house in order, it will undoubtedly face some sort of fiscal crisis in the next few years.

“In the long run the Buhari Government must make a concerted effort to diversify the country’s economy away from oil as well as take steps to widen and increase the revenue base, and it should look to settle its major contingent liabilities sooner rather than later,” Brannon said.

The country could also use help from the IMF to implement fiscal reform and give it the political cover to make changes that may inflict some political pain in the short run, but are necessary for it to grow and achieve some sort of long-term budget solvency. Without quick action, the country may not be far away from a sovereign debt crisis.