Financial analysts at FSDH Research have called on the federal government to accelerate revenue generation so as to meet all debt obligations without sacrificing other important responsibilities.
The analysts also said the government should tie loans to specific projects which will increase the competitiveness of the Nigerian economy to attract investment, create job opportunities and generate diversified revenue for the country.
FSDH Research stated this in a report, following recent debate that Nigeria’s public debt was too high. In reviewing Nigeria’s debt profile, FSDH Research observed that the level of debt had been on the increase over the years, hitting N24.39 trillion as at March 2019, the total public debt increased to N24.95trillion from N24.39trillion as at December 2018.
The analysts noted that for a country with a Gross Domestic Product (GDP) of over N130trillion, that debt level is not too much, explaining that the debt-to-GDP ratio is 19.03 per cent, which is below both the 25 per cent benchmark set by the FGN and the 56 per cent international threshold set for countries in Nigeria’s economic peer group.
“Therefore, Nigeria is actually under borrowing at the current level. It has the capacity to borrow an additional N7trillion, given the 25 per cent benchmark. The main problem, however, is the country’s ability to service the debt without causing untold hardship on the country. Low revenue generation makes it very difficult for the FGN to meet its debt obligations without sacrificing other important responsibilities,” FSDH said.
The analysts said although it is difficult for any country not to borrow, there are key questions each country must ask.
“How much debt should they contract? What projects will the debt be used for? How will the loan be repaid, as well as the associated interest? Whom should they approach to lend the money? What will be the impact of the loan servicing on the country’s ability to perform her obligations to the citizens? Some countries have shown that debt in itself is not bad. What truly matters is the productivity of the debt that is contracted. Countries such as China, South Africa, India, UK and USA have high Debt-to-Gross Domestic Product (GDP) of over 50 per cent.
These countries, however, have managed to deploy their borrowings into activities that can stimulate revenue generation including education, transportation, construction, security, technology, and other growth-enhancing infrastructure. By utilising these borrowed funds in areas that improve the ease of doing business in their countries, they have been able to grow their economies further, attract new investment, create job opportunities, and establish more avenues for their governments to grow their revenue. So, in itself, debt is not bad after all. However, the loan contracted must not be spent on consumption. If a 30-year loan is contracted but is spent on a year of consumption, there is a problem as unborn generations will carry the burden of paying for what they did not enjoy. But imagine using the loan to improve infrastructure and security in the country that will lead to job creation, people will be willing to pay taxes from which government will repay the loan,” FSDH said.
FSDH Research recommended that the Debt Management Office (DMO) considers the issuance of discount bonds (zero coupon bonds) to manage the interest expenses of the FGN in the short-term, saying the low interest rate environment, both in Nigeria and in the international market, provides a good opportunity for the government to lower its interest expenses.