Senators and the rising debt profile

The Senate has expressed concern about the rising level of Nigeria’s debt. Members of the Senate expressed this concern while discussing the general principles of the 2019 budget, describing the nation’s rising debt profile as alarming and unhealthy for the economy. According to some of the senators who spoke during the session, the government’s borrowing plans to fund the N1.86 trillion budget deficit, which constitutes 1.3 per cent of the nation’s Gross Domestic Product, is too high. They worry that the projections in the budget based on the oil price benchmark of $60 and production estimate of 2.3 million barrels per day is unrealistic, considering the volatility of the international oil market and uncertainties in daily production outputs. This means that if the government is to fund the budget effectively, it may have to borrow more than the projected deficit financing in the budget of N8.83trn presented by President Muhammadu Buhari on December 19, 2018. They also worry that allocations to various sectors were not designed to grow the economy through job creation and empowerment.

The Deputy Senate President, Ike Ekweremadu, emphasised that borrowing was becoming increasingly unsustainable and cautioned against mortgaging the future of Nigeria’s children. “Some countries are already in danger, including Indonesia, because of the borrowing they had in the past. For every money we borrow, there must be a day for payment,” he said. He called for more creative ways of infrastructure financing such as public private partnership and concessions. Senator Dino Melaye, on his part, warned that “The Federal Government has spent $14 billion to cushion, maintain and stabilise the naira. We no longer have enough foreign reserves to continue to cushion the effects of the devaluation of the naira.”

It will be recalled that Nigeria was removed from the shackles of the debt burden in 2006 through a $18 billion debt buy back arrangement that saw the country pay over $12 billion to the London and Paris clubs under President Olusegun Obasanjo’s government. As we have noted in previous editorials, under the debt burden, Nigeria was forced to adopt austerity measures culminating in a structural adjustment programme (SAP) that significantly weakened the capacity for service delivery and social protection. In the event of cutting social spending central to SAP, state legitimacy was eroded even as the struggle over the shrinking resources of the state intensified. Ethnic and other divisions in the society deepened, leading to the outbreaks of intergroup violence which has characterised social and political life in Nigeria since then.

In decrying the rising debt profile, the Senate is joining its voice with a number of Nigerians who have drawn attention to this dangerous development.  Last year, the Deputy Secretary-General of the United Nations, Amina Mohammed, raised the alarm about the rising level of Nigeria’s debt. Speaking at the International Monetary Fund (IMF) and the UN Working Together Conversation, Mohammed, who was Minister of Environment under the current government of Muhammadu Buhari, warned that Nigeria might return to the unhealthy debt situation of the 1980s and early 2000s. Earlier in 2017, a former Deputy Governor of the Central Bank of Nigeria (CBN) and presidential aspirant in the recently concluded general election, Professor Kingsley Moghalu, described Nigeria’s rising debt burden as worrisome.

He stressed that history had shown that previous reliance on foreign loans failed to contribute to the economic growth and development of the country. Instead, the country became subject to creditor conditionality when it was unable to meet its obligations in times of recession or crisis. The IMF has also consistently warned Nigeria of the consequences of the high cost of servicing debts, which could consume substantial amounts of government revenues. Already, two-thirds of Nigeria’s tax revenue is at present applied to servicing debt annually. When a country has to spend significant parts of its revenue to service huge debts, it has very little left to fund services and development. This in turn affects important social infrastructure such as health and education.

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Some have argued that Nigeria’s Debt-to-Gross Domestic Product remains low at 19 per cent, which makes it safe to borrow.  This is wrong given the fact that for a developing country like Nigeria, what matters is the debt service-to-revenue ratio, which should concern every Nigerian. Some have also made a comparison of the levels of borrowing between Nigeria and the United States to support the view that Nigeria’s borrowing is minimal. This is unfortunate because it involves comparison of apples with oranges. The United States, apart from being the largest economy in the world, is also one of the most sophisticated economies. Furthermore, most countries of the world keep their foreign assets in US securities.  The current leadership, policymakers and concerned citizens of Nigeria must be wary of taking Nigeria back to the debt trap.

Statistics from the Debt Management Office show that Nigeria’s external debt commitment rose by $11.77bn in three years, from $10.32bn in June 2015 to $22.08bn as of June 30, 2018. This means that the country’s external debt has grown by 114.05 per cent in three years. Multilateral debt made up $10.88bn or 49.28 per cent of the country’s external debt profile. Most of the increases occurred in the area of commercial loans.  Commercial foreign loans, which stood at $1.5bn on June 30, 2015, had risen to $8.8bn by June 30, 2018. This means that the country’s exposure to commercial foreign loans has risen by $7.3bn or 486.67 per cent in three years. The nation’s foreign and domestic debt stock as of September 30, 2018 stood at N22.428trn.

Certainly, Nigeria’s debt profile is rapidly deteriorating.  According to the DMO, Nigeria has moved from “low risk of debt stress” to “a medium-risk of debt distress”. There is therefore a basis to assume that it will move on to “high-risk of debt distress” in the near future. There is a clear and present possibility of entry into a major debt trap in the near future if urgent and adequate measures are not taken to shore up Nigeria’s revenue collection and control borrowing. We call on the government to take measures to deepen revenue collection instead of borrowing. The government must also plug leakages and diversify revenue sources. It should provide incentives and opportunities for investors. This should be done at all levels of government. The states should also be constrained in debt accumulation. All governments must observe the guidelines of the Fiscal Responsibility Commission (FRC) regarding borrowing.