ANALYSIS: Nigeria and the Kiss of Debt (Part 1)

Selected Africa Countries Debt Profile. [PHOTO CREDIT: Source: IMF dataset, SPMProfessionals]
Selected Africa Countries Debt Profile. [PHOTO CREDIT: Source: IMF dataset, SPMProfessionals]

An average Nigerian confidently says, Nigeria is the giant of Africa! The saying is tied to the belief that, in the context of growth, sport and religion; Nigeria is the giant of Africa. On the contrary, an average statistics of 2012-19, among some selected high-debt African countries which include Angola, Cameroon, Ghana, South Africa, Cote d’Iviore and Rwanda showed that Nigeria accounted for 43 per cent of the total government debt owed by these countries, followed by Angola with 22 per cent. In terms of economic growth rate, Nigeria is ranked 5th amid the selected countries. To this end, could it then be logical to argue and conclude that Nigeria is the giant of Africa, not in terms of growth rate but in terms of debt accumulation?

Today, Africa Development Bank (AfDB) is saying Nigeria’s debt profile, like that of many other African Countries, is not as bad. This is against the backdrop world bank and International Monetary Fund (IMF) warnings. What is the true picture? How bad is the bad? Are we already being kissed on our foreheads by debt?

Stylized Facts and Trend

Would it be right to say Nigeria had been persistently and constantly treating her ailments with wrong medications? Overtime in Nigeria, total public debts have been a supporting pillow on which Nigeria rests her head after the mainstay of survival, crude oil. Nigeria’s debt profile could be traced back to past decades before independence but remained small or insignificant till 1978 majorly because of the effect of oil boom of 1972 – 1973 which ameliorates Nigeria’s debts stock. Following the economic recession of 1977/1978, Nigeria raised the first $1 billion loan from International Capital Market to finance Infrastructural Projects. This action led to increase in the nation’s debt stock to $5.09 billion. Nigeria’s external debt stock increased by 73.96 per cent in 1980 which raised the value of external debt to $8.855 billion. In 1982, a fall in oil price resulted in massive borrowing by the federal and states government from the International Capital Market and this was done without any conscious attempt to address the main problem of the economy.

On December 6, 1986, Nigeria signed the first bilateral debt rescheduling which involved a whopping amount of $2.9 billion. Nigeria was allowed to settle her debt within six years with additional grace of 2 years. As at this period, it was quite evident that the rescheduling would be first of many since this type of consolidation would only buy Nigeria more years to repay her debt. Nigeria’s heap of debt without significant impact could be attributed to partially-executed projects and completed projects that are not operational which were partially financed by the debt. Such projects include Ajaokuta Steel Mill, Katsina Steel Mill, Jos Steel Mill, Delta Steel Company, Iwopin Paper Mill, Adiyan Water Project and National Identity Project. These are projects that should be generating revenue for the servicing of the country’s debt but have been abandoned and not operational due to inefficient management of resources and political instability. As at the end of 2005 fiscal year, President Obasanjo had to negotiate for a partial trade off of the Paris loan to $19 billion. In recent years, Nigeria’s debt profile has been tremendously on the increase and this has overtime raised the question; where are the funds channelled to?

Between 2010 and 2018, Nigeria’s external debt was more than ₦16.7 trillion which is a 128 per cent increase from the previous balance and when compared to the previous debt stock before 2010, it is more. This means Nigeria has been borrowing more in recent years than in the previous. As at the end of January 2019, the Central Bank of Nigeria warned the country of the risk of going back to pre-2005 Paris Club level if the borrowing behaviour continues. Debt Management Office of the federation reported Nigeria’s debt stock to be ₦26.2 trillion as at September 2019, with external debt taking 31.55 per cent of the total debt while the domestic debt takes 68.45 per cent.

Total Debts Accumulated by Government between 1990 and 2018. [CREDIT: Source: Author’s computation using CBN Statistical Bulletin Data, 2019]
Total Debts Accumulated by Government between 1990 and 2018. [CREDIT: Source: Author’s computation using CBN Statistical Bulletin Data, 2019]
Source: Author’s computation using CBN Statistical Bulletin Data, 2019

It can be observed from the above trend that there has been a consistent and aggressive rise in country’s debts profile with no simultaneous and consistent increase in the economic growth and the standard of living of the people of the economy (see Figure 2). As of today, CNN reports that an estimation of 87 million Nigerians or about half of the country’s population still live in extreme poverty using the international poverty line of $1.95 which coincides with the 53.6 per cent poverty rate in 2009 as stated by the World Bank. Thus, why then do we need to continue to incur debt if the debt does not translate into growth and development?

Debt Sustainability Framework Analysis

The International Monetary Fund and the World Bank in 2006 reviewed the debt sustainability analysis framework that allows for certain parameters to be considered before a nation can embark on debt accumulation. The idea of the framework is to examine if such nation has the ability to pay back its debt and/or if such nation has enough liquid assets to finance the liabilities attached to the debt. To this end, the argument as to whether it is suitable for Nigeria to continue to borrow is based on this analysis.

The first parameter to be considered is the debt-to-GDP ratio. Debt-to-GDP ratio ascertains the necessary condition or the nation’s solvency in debt sustainability. Simply put, debt of the nation relative to final goods and services produced within the economy, usually in one year. For Nigeria, the debt-to-GDP ratio score according to the debt management office as at December, 2018 stood at 19.09 per cent. From recent statistics as at September 2019, as obtained from the debt management office and CBN statistical bulletin, the debt-to-GDP ratio score for Nigeria now hits 24.82 per cent (an equivalent of 30 per cent increase), relative to the country’s specific limit of 25 per cent (up to 2020) and the threshold limit of 55 per cent revised by IMF/WB’s for Nigeria’s peer group countries. A study by the World Bank found that countries whose debt-to-GDP ratios exceed 77 per cent for prolonged periods, experience significant slowdowns in economic growth. In the real sense, every percentage point of debt above this level costs countries 1.7 per cent in economic growth.

In addition, it is expected that debts are paid not from the gross domestic product of the country, but the revenue base of the country. Thus, giving preference to Debt-to-GDP is nothing but a myth. Beyond the economic growth, what is the revenue base? To this end, debt-service to revenue measures the proportion of the total revenue used for debt servicing. According to BudgIT 2019 report, Nigeria’s revenue is at a shameful level, as the current debt servicing level hits over 60 per cent relative to 22.5 per cent threshold given by World Bank; which means for every N100 earned by the government, N60 is used for debt servicing, leaving the government with N40.

Furthermore, a need to review the debt servicing and trade balance of Nigeria can also be placed on check. According to IMF, existing debt and accumulated interest can be sustained primarily by budget surpluses. In other words, debts can be sufficiently sustained when a nation runs on a surplus budget. On the contrary, Nigeria runs a deficit budget. For example, Nigeria runs a deficit budget of N1.92 trillion and N2.18 trillion in 2019 and 2020 respectively. Thus, heavy budget servicing makes the fiscal stance more vulnerable and detrimental to both domestic and external shocks.

In addition, it is also logical to argue if truly our debt accumulation is purposed for growth in the economy, then the debt accumulated overtime should have translated to growth. To this end, let us have a quick check of the rate of debt accumulation versus rate at which the economy grows. It is expected that for our debt to be sustainable, our debt rate must be lesser or at least have an equal rate with the economic growth rate, but not greater. Statistics showed that in recent years, Nigeria recorded a borrowing rate of 33 per cent, 26 per cent and 12 per cent as against the growth rate of -1.61 per cent, 0.80 per cent and 1.93 per cent in 2016, 2017, and 2018, respectively. For further clarity on this, figure 3 below presents us with the actual trend of the borrowing rate against the economic annual growth rate.

Borrowing rate and GDP annual growth rate between 2000 and 2018.
Borrowing rate and GDP annual growth rate between 2000 and 2018. [Source: Computation from CBN, 2019 Statistical Bulletin]Source: Computation from CBN, 2019 Statistical Bulletin
Lastly on this argument, is the borrowing profitable in the long-run? To answer this, a parameter of the GDP growth rate versus the population growth rate is considered. It is expected that for a nation to be prospective in debt sustainability, her population growth rate must be less than or equal to her economic growth rate. Simply put, the rate at which the population grows must be less than the rate at which her economic grows. In 2019, Nigeria recorded a population growth rate of 2.6 per cent (World Bank) as against the economic growth rate of 2.28 per cent. With this statistics, how hopeful is our hope for a better Nigeria? Could It be nothing but a pitiful and wretched hope?

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Continuous Borrowing and Economic Development in Nigeria

In the 2017 fiscal year, the federal government spent N 1.8 trillion to service debts alone while it spent N1.4 trillion for capital investments i.e. debt servicing was more than capital expenses by over N400 billion. In 2019, the debt servicing to total implemented budget is around 40%, which poses problem for the country in the medium term. In dollar terms, the government has borrowed $35 billion that is, N10.68 trillion, about 65% increase since 2015 as at first quarter 2019, with the government paying as much as $18.9 billion (N5.806 trillion) for debt servicing between 2015 and 2018, an amount that is more than the total capital spending, more than 80 per cent of total deficit, and more than half of what the government borrowed, all within the same period. In fact, the total spending on debt servicing is far more than the combined budgets for education, healthcare and water resources within this period of 2015-2019. This means that the federal government is either borrowing to pay interests on debts that is service debt or paying more interests than spending on development.

Between 2011 and 2014, the average budgetary allocation to education was 10.4 per cent, but between 2015 and 2018, the average was 9.0 per cent. In 2018, the proposed budget on capital expenditure was N2.9 trillion as against the actual spending of N1.7 trillion: that is the government spent just 60 per cent of the proposed capital expenditure which has a multiplier effect on the standard of living index. In fact, education and health budgets have shrunk as most of the capital spending has not resulted in any significant improvement in facilities across educational and health institutions. According to Punch newspaper editorial (3/5/2019), between 2016 and 2019, a meagre N475.3 billion was allocated to the 21 federal teaching hospitals, an average of N22.6 billion for each hospital for the three years (or N7.5 billion per year for each hospital). According to the editorial, only N8 million is allocated to the OAUTH as monthly statutory running cost, while the teaching hospital spends N13 million on monthly electricity bill and N5 million to buy diesel. UNNTH, which was allocated N5.5 million monthly, spends N18 million on electricity. This means that health services will have to be commercialized the more in these health institutions, or quality of health service delivery will fall. This is already happening, as health service fees have increased in these institutions while two children wards in OAUTH have been closed.

While government claimed to want to build or rebuild 10,000 primary health institutions, which ordinarily should lead to massive employment of medical doctors and health workers, former health minister was recently quoted to have asked medical graduates to go into farming, while labour minister (publicly) stated that Nigeria had adequate number of doctors, even when doctor to citizens ratio is around 1:6400 as against WHO recommendation of 1:600. The main areas where the huge budgets have gone to are debt servicing and capital expenditure especially on government bureaucracy (office buildings, furniture, military hardware, etc.), roads and rails. Aside from the fact that many of these projects are funded through loans, the effects of these projects on the economy in terms of spending is minimal. According to the government’s chest-beating data, more than 1,262 km of roads have either been constructed or rehabilitated in the three and half years of the present government. Also, more than N3 trillion has reportedly been spent on capital projects, with about half of this going to roads. Yet, according to government, this only generated less than 79,000 jobs mostly part-term or casual jobs associated with the construction industry. The effects of this ‘huge’ spending on roads and rails on other sectors of the economy has been minimal or infinitesimal. We can agree that the inconsistency between debt accumulation and its impact on economic performance can be attributed to misallocation of funds and high rate of corruption in Nigeria. In 2019, Nigeria was ranked 146 out of 180 countries on corruption perception. Data from Transparency International showed that Nigeria’s Corruption Perception Index increased through 2005 – 2019 period ending at 26 score in 2019 (CPI Score relates to perceptions of the degree of corruption as seen by business people and country analysts, and ranges between 100 (highly clean) and 0 (highly corrupt).

Can we say we have debt crisis or are our debt issues still manageable? The warnings coming from IMF and IBRD, are they genuine? Is AfDB truly considering all situations and our environment? Are these debts translating to development or investment? I shall show the relationship between debt and investment on our economy, implications of coronavirus and debt as well as alternatives to debt financing in the second part of this article.

Kindly be on the lookout for the part two of this article.

Paul Alaje
Paul Alaje

Paul Alaje,
Senior Economist,
SPM Professionals

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