As the federal government continues to search for ways to take the country out of its present economic recession, a report has indicated that Nigeria may be approaching a debt trap.
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.
The Managing Director/Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, gave the warning in a report at his latest monthly executive breakfast meeting at the Lagos Business School (LBS).
Nigeria, Africa’s top oil exporter has been hit by low oil prices and depleted foreign reserves that have plunged the country into recession.
The National Bureau of Statistics (NBS) recently revealed that the country’s GDP contracted by 2.06 per cent in the second quarter of 2016, compared to the negative growth of 0.36 per cent recorded in the first quarter.
The country recently got a lifeline from the African Development Bank (AfDB), with the bank stating that it would support the country with the sum of $1 billion to help it address the N2.2 trillion deficit in the 2016 budget.
It is also in talks with the World Bank to plug its budget deficit, just as it is getting set to issue a $1 billion Eurobond.
But the report cautioned against a debt trap. It also pointed out that half of government revenue was being used to service debts.
It, however, stated that Nigeria is still within the healthy debt stock ratios.
The Debt Management Office (DMO)’s report recently showed that the federal government debt as at June 2016 was N13.79 trillion.
Furthermore, the report showed that invisible sector accounted for the 33.5 per cent of forex disbursed in 2016. He argued that the present currency misalignment in the economy began in 2014. This, it further stated was compounded by domestic fiscal imbalances and leakages, low investment and divestment, subsidies, rent seeking and cronyism, and huge debt servicing costs.
On the other hand, the report stated that fiscal balance in the economy was crippled by oil price crash and output disruptions, while revenue sources depleted at a faster pace than expenses.
The current fiscal challenges facing the economy include revenue generation, revenue sources depleted at a faster pace than expenses, fiscal balance crippled by oil price crash and production outages and financing large deficit.
Potential risks to the Nigerian economy includes terrorism and insurgency, economic crisis may deteriorate into social unrest, labour unrest and wage increase demand; exchange rate risk, political squabbles and lack of consensus, policy delays, among others.
It projected that the Nigerian economy was expected to recover in 2017 with growth forecast of 2.2 per cent.
“Troubled oil sector and crippling infrastructure to impede growth potential. Inflation to average 16 per cent in 2016. Inflation expected to average 15.4% in 2017 and 11.5% in 2018. Moderate improvement driven by relative currency stability and increase in global commodity prices. Oil production is to average 1.64 million bpd in 2016,” it predicted.
Furthermore, the report anticipated slight improvement to 1.69 million bpd in 2016, saying that the economy may recover in the next 18 or 36 months.