- Nigeria’s debt situation is a sore thumb to President Bola Tinubu’s administration.
- If the government is not careful, Nigeria might get to the point where servicing its debt would pose a significant challenge.
- To handle Nigeria’s mounting debt, President Bola Tinubu’s administration needs to deal with the country’s declining revenue.
As the 16th president of Nigeria, Bola Ahmed Tinubu has inherited an economy grappling with record-high inflation, enduring unemployment, extreme poverty, crumbling infrastructure and high levels of insecurity. However, Nigeria’s debt situation is a sore thumb among these challenges.
Nigeria’s external debt stock stood at US$41.69 billion in 2022. Multilateral lenders accounted for almost half of this figure, with Eurobonds taking about 38 per cent of Nigeria’s external debt. China’s Exim Bank accounts for US$4.3 billion, or 86 per cent of the $5 billion in bilateral debt.
The country’s public debt stock – what the government owes in total – was about US$100 billion in 2022. External debts have proven a significant burden for African countries since they are denominated and serviced in foreign currencies, particularly the US dollar. Thus, exchange rate fluctuations and currency depreciations have raised interest payments, constricting budgetary and fiscal spaces.
Nevertheless, Nigeria’s debt crisis is a concern, but it should not stand in the way of President Bola Tinubu’s ability to revitalize its economy. With Nigeria’s debt levels proving unsustainable, the new administration must prioritize interventions to remedy this situation.
Nigeria’s debt sustainability
Economists use different indicators to determine a country’s debt sustainability, but two have proven more prominent. One of the significant indicators is gross debt as a proportion of gross domestic product (debt-to-GDP ratio). Nigeria’s debt-to-GDP ratio was 38 per cent in 2022. The sub–Saharan African average debt-to-GDP was 56 per cent.
World Bank research has shown that debt begins to hurt economic growth once the debt-to- GDP ratio exceeds 77 per cent. Considering this threshold, Nigeria’s debt-carrying capacity is still strong.
Prudent and moderate additions to the West African country’s debt stock would not push the economy towards debt unsustainability, at least in the next few years. This does not mean that the new administration should go on a borrowing spree to finance vanity and frivolous projects. It simply means Nigeria’s debt situation cannot risk economic growth, employment creation and poverty alienation.
The debt-service ratio represents another indicator of debt sustainability. The ratio represents the share of export earnings used for debt servicing –the principal and the interest payments. A healthy debt-service ratio is below 18 per cent.
In 2021, Nigeria’s debt-service ratio stood at 16.2 per cent, compared to 3.2 per cent in 2015. The 2021 percentage indicates that Nigeria’s debt situation has gotten worse. Thus, if the government is not careful, Nigeria might get to the point where servicing its debt would pose a significant challenge. With an average debt-service ratio of 19 per cent in 2021, Nigeria’s debt situation is not as dire compared to many African countries,
Raising Nigeria’s revenue
To handle Nigeria’s mounting debt, President Bola Tinubu’s administration needs to deal with the country’s declining revenue. Nigeria’s revenue-to-GDP ratio is the fourth lowest globally.
The government revenue to GDP ratio decreased from 13 per cent in 2010-2014 to 6.9 per cent in 2020. The 2015-2020 global and sub-Saharan Africa averages were 20 per cent and 24.2 per cent, respectively.
Given the volatility of the global energy market and the pervasive theft of oil in Nigeria, Nigeria’s dependence on oil as a significant source of revenue suggests that the country’s revenues will continue to decline. The sluggish economic development (below 3 per cent) projected by the World Bank for the next three years would also reduce the country’s ability to generate revenue.
Rising government expenditure
In the meantime, government expenditures have increased faster than anticipated making borrowing necessary to offset the deficits. With a significant proportion of the country’s revenues allocated toward debt servicing, the government is in a somewhat borrowing cycle.
In 2022, Nigeria’s debt-revenue ratio stood at 80.6 per cent, significantly higher than the World Bank’s recommendation of 22.5 per cent for developing nations.
Many expect the ratio to surpass 100 per cent by the end of the year. High debt-to-revenue ratios result in an endless cycle of indebtedness. The government must borrow to finance expenditures since most revenues go to debt servicing. As debt increases, more income is allocated to debt service, increasing the debt-to-revenue ratio.
While Nigeria’s debt-to-revenue ratio is exceptionally high, its external debt service-to-revenue ratio remains moderate at 20 per cent and lower than many other African nations. As such, 20 of every 100 naira in revenue goes to servicing external debt, leaving 80 naira for government expenditures and domestic debt service.
Although Nigeria’s debt-to-GDP ratio remains manageable and below IMF-specified levels, it is concerning that it has kept rising over the past decade. In 2010, it was only 9.3 per cent, five years after Nigeria reached a landmark consensus with the Paris Club of creditor nations for $18 billion in debt relief and a $30 billion reduction in the country’s debt stock.
The debt-to-GDP ratio stands at 38 per cent, and experts project to rise to 43 per cent over the next five years. Concerns remain that the government will continue depending on loans to finance economic growth in light of diminishing government revenues, sluggish economic growth, and increasing expenditure demands.
How to get Nigeria out of debt
President Bola Tinubu’s administration should ensure Nigeria’s debt situation does not worsen. The new government should manage the country’s debt prudently. Crucially, the government should avoid returning the nation to the turn of the millennium when the debt-to-GDP ratio exceeded 50 per cent.
Tinubu’s administration should reduce the high cost of governance, do away with wasteful spending and address endemic corruption. Perpetual borrowing to solve economic problems can plunge the economy into destructive and unsustainable indebtedness.
Given the low revenue and the numerous projects required to promote economic growth, job creation and poverty alleviation, the Tinubu administration will have to continue with the deficit spending policy, financed mainly by domestic and external borrowing. The question will not be whether to borrow but how much.
Drastically reducing the cost of governance could prove difficult if political patronage continues. A long-term solution to Nigeria’s debt situation remains in exploring new revenue sources. To change the current narrative on external debt, President Bola Tinubu’s administration should introduce policies to improve Nigeria’s economic fundamentals.
A country’s debt stock does not matter as much as the quality of its economic policies. If correctly and strategically applied, economic policies could result in budget surpluses that can eventually ease debt burdens.
A good starting point would be to invest in physical capital and infrastructure (especially electricity and road networks); provide access to capital for micro, small and medium-sized enterprises (MSMEs); and support agricultural development.
President Bola Tinubu’s administration urgently needs to diversify the economy, make it less reliant on crude oil and expand Nigeria’s revenue base. The government should look to rebuild non-oil sectors of the economy to generate more revenue to finance government spending and economic projects.