Dealing with Nigeria’s High Debt Service-to-Revenue Ratio


The IMF red flag on the high debt service-to-revenue ratio, which it raised for the second time this year, has been a cause for concern for stakeholders in the economy. But the government has allayed the fears on the danger it may portend, writes Kunle Aderinokun 

Debt is a financial obligation or an amount due for repayment. This requires allocation of resources albeit scarce.  That is why when it comes to the national debt, stakeholders in the economy and observers are critical of the issue  because a lot of tax payers’ money goes into fulfilling obligations or servicing loans that have been contracted on behalf of the citizens.  It is therefore not out of place or surprising that Nigeria’s debt service status has been a subject of debate  in recent times. 

Owing to dearth of resources, occasioned by dwindled  fortunes of oil and alleged mismanagement by the immediate past government,  the current administration led by President Muhammadu Buhari has resorted to borrowing to augment the inadequate funds at its disposal. The effort, the government  claimed, was geared towards availing it with the requisite resources to spend its way out of its challenges.

But government’s  debt management has come under the watchful eyes of international observers and their local counterparts, nay economic analysts.


IMF Cautions

The latest is the report of the International Monetary Fund, which reiterated that debt servicing costs were becoming a burden on Nigeria and other developing countries, especially, oil-producing countries. The other affected oil-producing countries are Angola and Gabon. In sounding this note of caution, the IMF pointed out that, the debt service costs would gulp more than 60 per cent of government revenues in the aforementioned countries in 2017.

“Even in cases where debt levels are still relatively low, tighter financing conditions and increased debt financing have started to worsen debt service burdens, with an upward trend in both the debt-service-to-revenue ratio and the external debt-service-to-exports ratio. The change has been most dramatic for oil exporters, with a seven-fold increase in debt service, from an average of 8 percent of revenues in 2013 to 57 percent in 2016, and has been especially acute in Nigeria (66 percent) and Angola (60 percent),” the IMF had indicated.

The Bretton Woods institution made its position known last week in its Regional Economic Outlook titled: ‘The Quest for Recovery’. 

This is not the first time the multilateral institution would be cautioning Nigeria on debt servicing. In a report issued at the end of its Article IV Consultation on Nigeria in March this year, it raised a red flag on the country’s debt service-to-revenue ratio, which it put at 66 per cent. 

According to the fund, “Even with a significant under-execution in capital spending, the consolidated fiscal deficit increased from 3.5 percent of GDP in 2015 to 4.7 percent of GDP in 2016, because of significant revenue shortfalls. This resulted, over the same period, in a doubling of the Federal Government (FG) interest payments-to-revenue ratio to 66 percent.” 


FG’s Position

However, the Finance Minister, Kemi Adeosun, who had earlier stated that the federal government would not  bequeath a portfolio of unserviceable debts to future generations of Nigerians, said while reacting to the IMF report that  the Federal Government’s revenue and debt management strategy would mitigate the country’s debt service risk and fast-track her development.

Adeosun,  who welcomed the advice of Nigeria’s international development partners, including the IMF, said the strategy would achieve a number of objectives that include: mobilising revenue whilst reducing the debt burden by lengthening the maturity profile, increasing foreign exchange reserves, reducing crowding-out of the private sector, and creating savings in debt service cost.

In fact, she argued that rather than making debt servicing a  burden on Nigeria,  the federal government  was saving N76.375 billion per annum from US$2.5billion borrowing and  N91.65 billion per annum from US$3 billion refinancing of short-term domestic debt.

According to the minister, a key element of the economic reform strategy was the mobilisation of revenue to improve the debt service to revenue ratio. This, she pointed out, was being undertaken through a number of initiatives including, the plugging of leakages and the deployment of technology revenue management.

She specifically cited the example of the Health Pay, a pilot cashless revenue project in the health sector, which recorded material increases in revenue.  The ongoing Voluntary Assets and Income Declaration Scheme (VAIDS) was equally expected to impact positively the level of tax collections.

Adeosun explained that, “The difference in our economic strategy is that we are changing the mix of revenue sources available to government from the traditional oil or debt to a combination of oil, debt and domestic revenue.

“This is a long term strategic reform which is critical to our future economic growth and in the short term will enable our debt service to revenue ratio to improve.”

In addition, Adeosun noted that the government was refinancing its inherited debt portfolio and this will lead to significant benefits, particularly a reduction in costs of funds.

 “The proposed refinancing of US$3billion worth of short terms Treasury Bills into longer tenured international debt is expected to save N91.65 billion per annum.

“Other benefits of our revenue and debt management strategy include: improvement in foreign reserves as well as reduced domestic debt demand, which will reduce crowding-out of the private sector and support the aspirations of the monetary authorities to bring down interest rates,” she added.

The government, according to her, did not see a significant devaluation risk as the implementation of the Economic Recovery Growth Plans (ERGP) reforms, over the medium term, is such that the naira is expected to strengthen.


 Analysts Speak

But economic analysts and market watchers, who  hold contrary views from  Adeosun’s, have x-rayed the issue and advise on utilisation of the  proceeds of borrowing and suggested alternative ways to  manage the debt servicing.

One of them,  Director General. West African Institute for Financial and Economic Management, Dr. Akpan Ekpo,  stated that there was no doubt that the cost of servicing Nigeria’s debt from revenue was quite high.

Ekpo believes no economy would like to burden itself with high costs debt servicing if most of its revenues go to servicing debts. 

“My position has been that there is nothing wrong in borrowing to finance capital projects such as roads, railways and power. Nigeria’s debt management office has the expertise to advice government on managing the country’s debt. It seems that the debt servicing/revenue ratio has stated by the IMF seems quite high (68%). I suspect that the IMF did not take into account oil revenues because of its volatility.”

Moreover, Ekpo added, oil revenues are exogenous; the economy has no control of its price and output. If oil revenues become part of the equation then the debt/servicing should be around 38% which is still high and above the threshold,”

As part of his suggestions, Ekpo  advised the federal government to borrow only to finance capital projects with proper analysis such that overtime the returns on the projects would pay off the debt. 

“Both debt and debt servicing must be sustainable to avoid the economy going into debt overhang as was the case years back. The structure of the economy must be altered to ensure that revenues come from other sources other than oil. 

“In financing projects, the public private ownership approach is also an option. External borrowing from multilateral institutions such as the World Bank and the African Development Bank, among others are preferable because of the concessionary terms, long-term of payments, low interest rate and possible rescheduling if the country’s economy experience difficulties. External borrowing has more flexibility especially as regards delayed payment and/ or rescheduling than domestic debt. The issuance of Sukuk bonds to finance road infrastructure is also a step in the right direction. The government must ensure that the country’s debt profile is sustainable. A modern market system is a casino economy which survives on debt!”

Similarly, another analyst, Director, Union Capital Ltd, Egie Akpata, said the IMF raised some valid concerns regarding the FGN debt profile. According to Akpata, spending 60 per cent of revenue on debt servicing is clearly not advisable.

Akpata indicated that, “The current FGN strategy of moving towards ‘cheaper’ off shore borrowing might reduce the debt service ratio on the short term but on the long term, guaranteed Naira devaluation would mean the interest savings might not materialise but the total debt stock will grow rapidly as the Naira devalues.

Akpata believes: “It would be helpful if we can move beyond the misleading debt/GDP ratio. That ratio is relevant to countries with very high tax/GDP ratios.”

“Also, the idea that the FGN can borrow huge amounts of money to help reduce the infrastructure deficit in the economy will likely lead to even worse FGN debt service ratios in the future. Most of this proposed infrastructure spend cannot pay for itself directly, is very expensive and might not be located where increased economic activity would lead to higher tax revenues for the FGN. Even if the tax revenues materialise in the distant future, they will be in Naira but the debt to be serviced would be in USD,” he added.

One solution, according to him,  would be to concession infrastructure development to experienced and well capitalised foreign operators who will bring in the required capital and expertise to develop these projects. “Even if the FGN provides some kind of performance based guarantees, this approach will likely lead to more cost effective infrastructure development, lower debt on the FGN balance sheet and after the concession period, the FG is still left with ownership of a functioning infrastructure asset,” he explained.

To the CEO, Global Analytics Consulting, Tope Fasua, “The figures are not jiving.”

Lamenting that, “It is already worrisome to any keen observer that we may be back solidly in the debt trap,” Fasua said,   “It has become almost cliché that it’s revenue to debt ratio that matters, not debt to GDP.” According to him, “It seems like the minister of finance is helpless in this regard, as she is merely under severe pressure to fund the budget by any and every means.” “The economy suffers leakages which political actors are milking heavily while she is unable to move forcefully against them.”

Fasua believes, “The structure of the economy cannot be altered in any salutary manner because politicians have their dead weights on the country, times are therefore so tough for Nigerians. The minister can only tide over by borrowing, and as she said recently, borrowing to finance old borrowings.”

“I believe successive Nigerian governments have not dreamed big enough for the people, and most have not been totally honest. 

How can Angola generate revenue of about $38billion yearly, and budget $44billion for 2017, while ‘a whole’ Nigeria, generates about $14billion and could only budget $22billion this year? South Africa budgeted $115billion this year for its 40million people, and generates at least $95billion in revenue. In terms of budgets and revenue, SA is at least 9 times Nigeria! So, the debate should probably be; where is Nigeria’s money?,” he also noted.

Also, the CEO, The CFG Advisory Ltd, Adetilewa Adebajo,  said the issue was  not new as it was raised and extensively discussed during the Article IV consultation earlier this year. “My take is that the government has properly captured the solutions to this problem within the ERGP. The key challenge now is implementation  and to consolidate on the gains of the efficiency and cost cutting unit with the MOF.

 We also need to  move our tax to GDP ratios to levels commensurate to our economic ranking. We have talked about diversifying the revenue base and the time to act is now,” Adebajo explained. 

Recalling that, the presidential enabling business environment council led by Vice President Yemi Osinbajo  and Minister of Trade and Investment, Okechukwu Enelamah, set out a 60-day national action plan backed by Executive Orders, he said,  “The result of the follow through with the implementation, has manifested in the improvement of Nigeria’s ranking with the World Bank ease of doing business, affirming an improving business environment. This is a positive signal to increased business confidence, Portfolio investment and FDI.”



Adebajo posited: “We need to borrow a leaf from this success and apply it to the debt service issues. The improved coordination between the CBN, MITI and MOF should help forestall any problems with debt service. The efforts of the finance minister to refinance the national debt profile in an effort to reduce borrowing cost should also be to begin to take effect early next year, which will be reinforced by falling inflation and the CBN cutting rates.