Nigeria’s Unending Debt Appetite

Obinna Chima writes that with it seeming endless appetite for borrowing, Nigeria may be approaching a debt trap

Mixed reactions have trailed the federal government’s last week announcement of its preparedness to issue N2.343 trillion ($6.2 billion) Eurobonds in the International Capital Market (ICM) to partly finance its N5.2 trillion 2021 budget deficit.

While some have argued that the move will be positive for the country as it would among others help improve the country’s foreign exchange position as well strengthen the external reserves, others believe that that it would further worsen the country’s debt position as well as further into a debt trap.

A debt trap is a situation in which a debt is difficult or impossible to repay, typically because high interest payments prevent repayment of the principal.

Nigeria, less than two decades ago had secured far-reaching debt forgiveness.

In preparation to the Eurobond issuance, the federal government last week appointed eight international and domestic transaction advisers.

The Eurobonds to be issued are for the purpose of raising funds for its New External Borrowing of N2.343 trillion (about $6.2 billion) provided for in the 2021 Appropriation Act to part-finance the budget deficit.

The eight transaction advisers included international bookrunners/joint lead managers–JP Morgan, Citigroup Global Markets Limited, Standard Chartered Bank and Goldman Sachs.

The Nigerian bookrunners to the proposed issuance is Chapel Hill Denham Advisory Services Ltd and FSDH Merchant Ltd who will act as financial adviser.

White & Case LLP would act as the international Legal Adviser while the firm of Banwo & Ighodalo are the Nigerian Legal Advisers.

The Minister of Finance, Budget and National Planning, Zainab Ahmed, had said the nation’s debt profile was expected to increase to rise to N38.68 trillion by December 31, 2021.

According to the DMO, Nigeria’s total debt was N12.12 trillion as of June 30, 2015, when President Muhammadu Buhari took over. It however stood at N33.10 trillion as of March this year.

Another disturbing development is the fact that the federal government spent 98 per cent of its revenue to service debt between January and May 2021, up from the 83 per cent recorded in 2020.

The government had projected to spend N17.8 trillion on servicing debt between 2021 and 2024.

This is contained in the 2022-2024 medium-term expenditure framework and fiscal strategy paper (MTEF & FSP) released by the budget office of the federation. It represents 47.6 percent of N37.42 trillion expected revenue within the four-year period. This means that for every N100 earned, the federal government would spend about N48 to repay debt.

According to the document, N3.12 trillion would be provided for servicing debts in 2021 based on the budget passed by the national assembly with an oil benchmark price of $40 per barrel.

In 2022, the federal government projects that N3.61 trillion would be spent on debt servicing.

The figure is expected to rise to N4.93 trillion by 2023, while N6.17 trillion will be used to service part of Nigeria’s debt in 2024.

Nigeria’s Paris Club Story

Six years into the administration of former president Olusegun Obasanjo, the government then was able to get the Paris Club to write off the country’s debt.
According to Obasanjo, the move then represented, for the first time, a total exit and freedom from Paris Club debt.
The package in final terms then yielded debt relief of about 60 per cent on Paris Club debt and Nigeria was made to pay off the 40 per cent balance through a buy back operation.

The total write off then was close to $20 billion which compared very favourably with the $40 billion write off of debts for the 18 highly indebted and poor countries of the world by the developed nations during that period.
The former president had stated then that, “This, debt relief offered to us, I am pleased and proud to say is the direct product of our relentless and persistent endeavour over the past six years.

“Fellow Nigerians, how did we get to the point where our debt burden became a challenge to peace, stability, growth and development?

“Without belabouring the point we can identify political rascality, bad governance, abuse of office and power, criminal corruption, mismanagement and waste, misplaced priorities, fiscal indiscipline, weak control, monitoring and evaluation mechanisms, and a community that was openly tolerant of corruption and other underhand and extra legal methods of primitive accumulation.”

He then urged Nigerians to learn from the past, saying Nigerians; especially policymakers must all show collective responsibility to prevent a return to the past.

Nigeria’s Rising Debt Profile

To the Managing Director, Coronation Merchant Bank, Mr. Banjo Adegbohungbe, while debt in itself is not bad, the issue is what its proceeds are invested in.

According to Adegbohungbe, “historically as a country, the challenge we have had is not the fact that we borrow, but the economic benefits that we derive from the debts we raised. So, it is not the fact that we borrowed, but what we did with the money.

“If we can be consistent about ensuring that the money is invested in infrastructure or in sectors that would ensure that there are derivable and tangible benefits in terms of economic growth, job creation and others, that in itself is not a bad thing.

“That is because when the economy grows, and those jobs are created and productivity improves, the government gets additional revenue in terms of taxes and so on and that improves its capacity to repay.”

The Coronation Merchant Bank boss noted that while people always look at the fact that the government is borrowing money, “they should also be talking about the things that we can use that money for.”

“Infrastructure is a very big example because of our high infrastructure deficit. So, suppose you are to invest in a lot of these critical infrastructures, the evidence is there that it will stimulate economic growth if we invest in things such as power, transport infrastructure, and others.

“The economy should be experiencing double-digit growth if those enablers were there. So, I think the argument has been largely one-sided when people talk about debt,” he added.

Also, a Senior Lecturer at the Pan-Atlantic University, Dr. Bongo Adi, pointed out the challenge facing the country remains that of low revenue profile.

He, however, did not foresee the country plunging into a debt trap.

According to him, “investment in infrastructure is very important. This is one thing that has continued to affect productivity in the country. An economy of almost 200 million citizens, should be doing a lot more than we are doing presently.

“We all can see that with the infrastructure that we have, it is not possible for us to achieve higher level of growth and quickly too. If we have the critical infrastructure enablers, I can tell you that this economy will be registering about seven per cent growth. And we need this in order to escape the population trap that we have got ourselves into and we need it to create job.

“The problem with our borrowing is that it is still the bureaucracy and same people who have been inefficient over the years that would be the ones to husband this process. So, we do not have confidence in them.”

But, he argued that the burden of creating infrastructure should be shifted to the private sector, while the government creates the enabling environment for them to thrive.

This, he said should be done through Public-Private Partnership.

According to the Director General of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Chinyere Almona, the country’s debt situation is worrisome.

Almona noted that Nigeria is an asset-rich nation owning hundreds of large state-owned companies, valuable parcels of land, and built structures in prime commercial locations that have been grossly under-utilised and contribute too little to the country’s fiscal and financial situation because their market values had not been ascertained.

“There is, therefore, a need for government to take urgent steps to establish the market value of these assets, securitise the corporate assets and commercialise the real estate assets to raise revenue for the government and foreign exchange inflows for the country.

“There is a need to replace existing debt stocks with asset-linked debt to ease the debt servicing burden; attract Greenfield Foreign Direct Investments (FDIs) into publicly-listed state-owned companies and generate new revenue streams from commercialised real estate portfolios,” she added.

To a former bank CEO and presently Managing Director of KSBC Advisory Partners Limited, Mr. Chika Mbonu, one of the key ways to get an economy out of recession or to reflate an economy struggling for growth is to spend your way out.

These spending, according to him, should help create the highest growth impact and stimulate economic activities, thereby leading to expansion in the GDP and increase government revenue.

Mbonu said the anticipated increase in revenue would in turn lead to new capital investments in the economy and would then enable the government pay back the principal and interest on these borrowed funds .

On her part, the Executive Vice Chairman, H. Pierson Associates Limited, Eileen Shaiyen, warned that Nigeria’s debt level has become a major course for all stakeholders.

According to her, while the country’s debt to GDP ratio has trended up from levels in 2016 at 23.41 per cent, 2017 at 25.34 per cent, 2018 at 27.26 per cent and 2019 and 2020 estimates put at 29.78 per cent and 31.35 per cent, respectively against an international threshold of 30 per cent.

Also, the country’s debt service to revenue ratio has trended upwards from 2011 levels of 21.2 per cent, to 2015 at 51.9 per cent, 2016 at 86.6 per cent, 2017 at 78.6 per cent, 2018 at 67.7 per cent and first quarter (Q1) 2020 at 99 per cent.

These, she pointed out was against the international threshold of 20 per cent to 25 per cent.

“This trend is very worrisome when considering the future of the country’s very youthful population in need of a major boost in economic growth through major fiscal interventions to stimulate education, health, infrastructure, etc., as against putting such expenditure into the service of debt that is perceived to be largely mis-applied,” she emphasised in a presentation.

Similarly, in terms of debt to revenue, she noted that the major index also showed major deterioration from estimates of 348 per cent in 2019 to 538 per cent estimated for 2020.

“These come with numerous other socio-economic consequences impacting on some of the key Sustainable Development Goals of poverty, hunger, health, education, as well as issues of social unrest, crime.

“Having wasted numerous opportunities to proactively and decisively confront the issues responsible for this poor state of financial affairs, there is now an urgent call to leadership at the Federal and State levels to embark on fundamental and structural changes to address this debt crisis,” she said.

According to her, in addressing the situation, the first good move would be to plug all major revenue leakages and therefore reduce the government’s dependence on debt financing.

She also stressed the need for increased investments, especially in critical sectors such as power.

“The long-term impact for the power sector is the increased availability of power and the huge multiplier effect of that on the productive sector and overall GDP,” she added.

Commenting further on revenues, the H. Pierson boss further noted that ramping up revenues through initiatives that would attract private capital into optimising the natural resources in each of the 36 states was fundamental, while the government mainly takes a regulatory role.

According to Shaiyen, each of the 36 states has massive natural resources that remain relatively docile, stressing that the government must fast-track initiatives that would unlock the private-sector-driven potentials in this sector, provide enhanced tax revenues to government and drive up overall GDP.

The CGF Advisory, a research and investment firm, on its part, stressed the need for the federal government to determine its financing needs, set its borrowing limit and then comply with Fiscal Responsibility Act

As part of its recommendations to reset the Nigerian economy, the firm stated that a major policy overhaul to reduce revenue vulnerabilities and budget deficits that jeopardise the economy, was needed.

It pointed out that key policy reforms would be imperative to support and sustain macroeconomic stability. These, it listed to include, among others, a foreign exchange management framework that reflects the market fundamentals, the acceleration of the country’s economic diversification agenda, and the oil and gas sector reform, among others.

In addition, it advised the federal government to cut overhead and recurrent expenditure, while increasing capital expenditure to total budget ratio.

“There is an urgent need to reduce debt service to revenue ratio and also urgently raise non-oil revenue through programs such as initiatives to drive more people into the tax net and increase tax to GDP ratio,” it added.

To an economist and former Deputy Governor of the Central Bank of Nigeria (CBN), Dr. Obadiah Mailafia, Nigeria risks sliding into the realm of debt-distressed nations its increasing ratio of revenue to debt service.

He pointed out that in a situation of debt distress, all resources would be used to service debt rather than building economic, social and strategic infrastructure that could guarantee citizens a better life.

He expressed concern that a situation where debt-servicing obligations outstrip capital expenditures or capital expenditure would be a rather worrisome one.

Mailafia observed that the change in percentage of revenue to debt servicing, “is likely to rise very substantially in the coming year as Fitch predicted in its March 2021 ratings”

The implication of the trend for the future of the country, which according to him, suggested that all resources would be devoted to meet the country’s debt repayment obligations or schedule.

“We live in hard times. Inflation and unemployment are spiraling out of control, in the context of slow growth, geopolitical tensions and widespread insecurity,” he added.

“You and I know that you do not use GDP to repay your debt. You use government revenue receipts to service your debts. In 2014, before the current APC-led administration came to power, the erstwhile President Goodluck Jonathan administration paid N500 billion for debt servicing.

“This amounted to a mere 10 per cent of total government revenue. We were in a relatively comfortable position.

“In the following year of 2015, coinciding with a global recession and precipitating fall in world oil prices, the debt repayment bill tripled to the figure of N1.5 trillion, amounting to 30 per cent of public revenue earnings,” he explained.

But by 2017 the figure rose to N3 trillion, which amounted to 61.6 per cent of government revenue. In 2020, the federal government made a total of N3.25 trillion in revenue while spending N2.34 trillion in debt-servicing.

This amounted to 72 per cent of revenue going into servicing our loans for that year. It is instructive that during the same year the government spent only N1.7 trillion on capital expenditure,” Mailafia added.

In order to address the situation, he urged the government “to cut back drastically on certain worthless expenditures while keeping a leash on the cost of governance.”

He also advised the federal government to engage with its creditors with a view to restructuring the country’s loans.

“There should be a more rigorous system of accountability for the continuing revenue-generating agencies of government – Customs, FIRS, NNPC and others,” he added.

From the foregoing, there is need for the federal government to address issues around domestic fiscal imbalances and leakages, low investment and divestment, ending of fuel subsidies, in order to reposition the economy as well as enhance its revenue profile. This is to enable the government meet its debt obligations.

Additionally, the government must tackle the rising trend of terrorism and insurgency, exchange rate risk and create the right environment for investments.