ANALYSIS: Nigeria and The Kiss Of Debt (2)

President Muhammadu Buhari and Vice President Yemi Osinbajo
President Muhammadu Buhari and Vice President Yemi Osinbajo

(This is the second part of the business analysis by economist Paul Alaje. Read the first part here).

Crowding-out effect of debts on private investment

In addition, a need to further examine the effect of government debt accumulation on private investment is vital given the prominent role investment plays in an economic activity.

These include employment opportunities, increased government revenue through company income tax and value added tax among others. Statistics shows that domestic debt accumulation account for 62 per cent of the total debt in 2018.

Domestic debt accumulation by government brings about scarcity in financial resources needed for private investors to further make investment in the economy. To this end, we say that private investment in Nigeria declined by 5 per cent between 2014 and 2018.

Correspondingly, according to NBS report, there has been a consistent rise in unemployment rate from 20.4 per cent in 2017Q4 to 23.1 per cent in 2018Q3.

Conclusively, domestic debt accumulation discourages private investment level in Nigeria through increased lending rate, inflation rate and scare resources in the financial market which further has a significant impact on the rate of employment and the economic activities of the country.

Debt proposal

The Federal Government of Nigeria on Tuesday, February 4 sought the approval of Senate for concessionary external borrowing of $22.8 billion purposed to enhance productivity of the economy via electricity projects, railway line, roads, agriculture, grant of soft loans to small and medium scale enterprise (SMEs) among others.

Furthermore, the justification for the loan as given by the Minister for Finance; Hon (Mrs) Zainab Ahmed was that the debt-to-GDP ratio of the country is below the threshold limit of 55 per cent as recommended by IMF and IBRD. Given this proposal, it is evident the country’s least condition of debt-to-GDP ratio of 25 per cent recommended by Debt Management Office (DMO) will be violated.

To further examine the implication cost attached to this; according the 2020 budget, the recurrent debt servicing constitutes 93 per cent of the targeted oil revenue using the benchmark price of $57 per barrel. What then is the implication of this given the coronavirus incidence relative to the Nigerian economy?

Coronavirus (COVID 2019) and Nigeria’s economy

A warning report released by World Bank showed that Nigeria will once again fall back into recession if the world oil price falls below the threshold of $50 per barrel which will stimulate the 53.6 per cent poverty rate, 23.1 per cent of unemployment rate, aggravate the nation’s debt profile among others.

This statement made by World Bank is plausible and logical, because 58.54 per cent of the government revenue is oil based and 90 per cent of Nigeria’s foreign exchange earnings as based on oil production and export (following MTEF, 2019 report).

Doctors moving a Coronavirus patient [Photo: AFP]
Doctors moving a Coronavirus patient [Photo: AFP]
In recent time, the issue of Coronavirus in China has placed a caution and retardation on the world economy. China, being the largest importer of oil (with about 20.2 per cent of the total crude oil imports) has stirred a general fall in demand for oil which then results to a consistent fall in the world oil price by 27 per cent (using CBN statistics) from 7th of January till 4th of February as the disequilibrium force between the demand and supply persist.

Dangote adbanner 728x90_2 (1)

Given this stance, depreciation of the Naira relative to US Dollar is one of the key exchange rate risks in the event of a prolonged oil price shocks, given that oil revenue is quoted in US dollars. Business that depends primarily on forex for imports of production inputs and capital could be deleteriously affected, alongside the CBN through the foreign reserve.

Furthermore on the harmful effect of the coronavirus incidence is the vulnerability of the country’s exchange rate to external shocks.

Exchange rate depreciation reduces the worth of Nigeria’s currency relative to the U.S dollar, which is the world trade currency. For example, if Nigeria borrows $10 million dollars, the Naira equivalent is N3.06 billion, using the official exchange rate of 306$/N.

If at the time of pay back, exchange rate depreciated by 17 per cent which is 359N/$ equivalent, Nigeria is expected to pay N3.59 billion, having an additional cost of N53 million to be paid. Is it still logical to borrow? In the real sense, we have lost over $900 million to coronavirus between January, 3 to February 3, 2020.

Even though the motive of the government policy can be proven right, but the means to achieve policy via debt accumulation will end up becoming a curse rather than being a blessing. What then is the alternative plan the government can deploy without having to incur more debts?

Freedom from debt

The first alternative policy to be highlighted is the Public-Private Partnerships (PPPs).

PPPs can be defined as the long-term contracts between a private entity and a government entity to make available a public asset or service of which the significant portion of the risk attached is carried by the private sector involved and for which its payment is in the form of future streams of income.

An example here is the Ajaokuta steel company in Kogi State. The private sector is allowed to make available the finance, project designs and build ups, and operate the assets for the economic life of the contracts while the government ensures adequate support in the property right and enabling environments and right policy.

The PPPs help to expand the options for private investment and the provision of infrastructural services. To this end, unemployment rate is expected to reduce, government revenue is strengthened, economic activity fostered, and inclusive growth is attained.

In addition, an outlook for the economy is a need for human capital development and political revolution, because, the strength of every economy lies of her political strength and human strength. This will further allow for government effectiveness, control of corruption and misappropriation of funds.

All revenues from crude oil should be allocated to capital expenditure, specifically infrastructure. The blessings of oil will have impact from urban to rural areas if we plan its spending on power, roads construction and rehabilitation, education and health among others.

States’ allocations from oil should also be invested on similar capital infrastructure. Recurrent expenditure would come from other sources. This will help, if not force us to block leakages and formulate as well as implement polices to stop misappropriations.

Long term development plan will save us from incessant and purposeless fiscal shortfalls and borrowings. Executive and legislature at federal and state level will need to work together to formulate a 10 to 20 years plan called National Economic Development Plan (NEDP). This plan will identify sources of revenue for the implementation period.

The government should work towards building a stronger institutional policy that will check against corruption in the country via technological systems checks and structured transparency.

Paul Alaje
Paul Alaje







Paul Alaje is a senior economist, SPM Professionals
He can be reached via

Coronavirus factsheet


PT Mag Campaign AD

All rights reserved. This material and any other material on this platform may not be reproduced, published, broadcast, written or distributed in full or in part, without written permission from PREMIUM TIMES.

Support PREMIUM TIMES' journalism of integrity and credibility

Good journalism costs a lot of money. Yet only good journalism can ensure the possibility of a good society, an accountable democracy, and a transparent government.

For continued free access to the best investigative journalism in the country we ask you to consider making a modest support to this noble endeavour.

By contributing to PREMIUM TIMES, you are helping to sustain a journalism of relevance and ensuring it remains free and available to all.


TEXT AD: To advertise here . Call Willie +2347088095401...

BE THE FIRST TO KNOW! Subscribe to our newsletter

* indicates required


Now available on

  Premium Times Android mobile applicationPremium Times iOS mobile applicationPremium Times blackberry mobile applicationPremium Times windows mobile application