FG Urged to Diversify Economy to Avert Debt Crisis

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By Eromosele Abiodun

Analysts at FSDH Merchant Bank Limited  have stressed the need for the federal  government  to  urgently  implement  policies  that  will  grow  and diversify the revenue base of the country to avoid imminent debt crisis.

In a report made available to THISDAY, they maintained that Nigeria’s rising debt profile remains higher than revenue growth,  adding that Nigeria  has  the  lowest  government  revenue  to  Gross  Domestic  Product  (GDP) ratio at six  per cent among some selected countries.

The experts added that Nigeria’s over dependency on crude oil revenue, combined with  volatility  in  both  the  price  and  production  of  crude  oil  are   major  reasons  for  sluggish  growth  in  government  revenue.

According to them, “Growing non-oil revenue will require that the Nigerian economic environment has inherent structures that can support business growth. Such structures include adequate physical infrastructure, policies, legal and regulatory frameworks that will make the economy business friendly to generate taxable profits.

“Our  analysis  of  the  ratio  of  the  interest  payment  on  domestic debt  relative  to  the  federal government’s  allocation  from  the  Federal  Account Allocation Committee (FAAC) shows that the FGN is spending too much of its revenue to pay interest on loans. This leaves the government  with  little  resources  to  spend  on  critical  sectors of the  economy  that  could  support  strong  growth  and  maintain  a healthy economy to generate revenue.”

The analysts added that the current high interest payment relative to revenue may also increase the credit risk of the country.

“Although the government has been able to meet its debt obligations (interest and principal payments) so far, if  the  current  situation  is  not addressed,  the interest rate on government loans may increase because of the perceived elevated risk. This would also lead to higher interest rates for private sector operators.

“It is important to note that the external environment is becoming tighter than before because of the rising interest rate in the United States.

“The Federal Open Market Committee (FOMC) of the US Federal Reserve increased the Federal Funds Rate by 0.25 per cent to a range of 2 per cent to 2.25 per cent on 26 September 2018.  FSDH Research predicts the FOMC will still announce another rate increase before the end of the year. This development will increase the borrowing   cost   on   any   new   Dollar   denominated   loan.

“Consequently, borrowing in the international market is no longer as attractive as it was before. It is crucial, therefore, to structure the Nigerian economy to enable it to generate revenue and rely less on borrowing to meet its basic needs, “they explained.