Is Nigeria Approaching Debt Trap?


There are concerns that at the rate at which the federal government is accumulating debt, without commensurate investment in infrastructure, the country may plunge into a debt trap, writes Obinna Chima

Since President Muhammadu Buhari re-presented the 2016-2018 $30 billion External Borrowing Plan of the federal government to the Senate for approval last week, there have been concerns that the country may be heading towards 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 secured far-reaching debt forgiveness. The country’s total public debt stood at $84 billion as of June 30, 2019. A breakdown of this showed that the external component was $27 billion, while the domestic component was $57 billion. 

Therefore, if the president’s request gets legislative approval, Nigeria’s external debt stock alone would rise to $114 billion, while the external debt would also climb to $57 billion.

Nigeria’s debt profile grew from N12.6 trillion in 2015, when President Buhari assumed office, to N25.7 trillion as at June this year, which was an increase of 104 per cent and will surge higher if the National Assembly approves the fresh request. The fresh loan request will certainly push up the country’s debt-service ratio which presently is about 60 per cent.

Owing to the development, some Nigerians have argued that with the economy floundering as well as the federal government’s inability to diversify the economy, the country may find it extremely difficult to meet its debt obligations in the future. 

They further argued that the federal government’s debt accumulation drive could place a burden on the future generation.  In addition, they warned that given the Nigerian government’s weak revenue generating profile, further indebtedness would not be sustainable and would likely lead to a debt crisis, especially if there is a plunge in crude oil prices.

But the federal government has doused the fears, saying the country’s debt sustainability analysis shows that there is enough headroom for borrowing. It reiterated that the country does not have a debt problem, stressing that its low revenue level remains a challenge to the nation.

The president in the request, explained that the Federal Executive Council (FEC) had approved the financial plan in August 2016 and sent to the Eighth National Assembly in September 2016 for consideration but it was then rejected.

Buhari in a letter to the Senate President, Dr. Ahmad Lawan and House of Representatives Speaker, Hon. Femi Gbajabiamila, read during plenary of the two chambers, sought the permission of the legislature to borrow the fund.

The in the letter dated November 26, 2019, gave reasons why his administration wanted to borrow the $29.96 billion, saying the funds would be used to finance 39 critical projects being executed by the federal government.

The two- page letter entitled: “Request for The National Assembly to Re-consider and Approve the FG’s 2016-2018 External Borrowing Plan,” reads: “Pursuant to sections 21 and 27 of the Debt Management Office (Establishment, etc) Act, I hereby request the resolution of the Senate to hereby approve the federal government 2016 – 2018 external borrowing plan as well as relevant projects under this plan.

Looking Back
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. 

“We must all commit ourselves to protecting, rather than squandering the future of our children. We must all agree not to remove the solid blocks on which our nation stands by accumulating debts that we cannot repay,” he had said.
Unfortunately, some have argued that recent developments suggest the country might return to the past.

FG’s Position 

The Director General, Budget Office of the Federation, Mr. Ben Akabueze, explained that Bi-annually, the federal government carries out a debt sustainability analysis, which is done by the Debt Management Office. 

According to him, the government would not be proposing to do further borrowing if it debt sustainable analysis does not support it.

“We think we need to move away from being sentimental about this issue. As you have heard us say repeatedly and the Minister of Finance has said on several occasions, we do not have a debt sustainability problem, but we have a serious revenue challenge and if we do not fix that, it could lead us to debt sustainability problem. 

“That is why the government is doing everything now to tackle the revenue problem. Right now, one ratio that is a major concern to everyone looking at our debt is the Debt Service to Revenue ratio. But if we fix the denominator, the debt service to revenue ratio would cease to be a problem.

“As you know, there is a medium-term borrowing plan and then there is the annual borrowing plan to fund the budget. For the 2020 budget, the deficit that needs to be financed by borrowing N1.6 trillion and that is the immediate request the president would want the National Assembly to address. That N1.6 trillion is split between foreign currency and domestic borrowing component, almost evenly.

“Essentially, the Fiscal Responsibility Act says we should borrow essentially for capital expenditure, unless there are exceptions, where you can do otherwise. And when you look at the budget, the capital budget, excluding the amount in statutory transfers, is N2.1 trillion and if we are planning to borrow N1.6 trillion, it stands to reason that all of that are targeted at the capital component of the budget. 

“The capital budget includes thousands of projects, so the debt can be used for any of the projects in the budget. So, at the point of consummating the transaction, that is when the specific debt is tied to any specific project as may be necessary,” he explained in a programme monitored on Channels Television.

Divergent Views


To a Senior Lecturer at the Pan-Atlantic University, Dr. Bongo Adi, pointed out the challenge remains the country’s low revenue profile. He, however, did not foresee the country plunging into a debt trap.

Furthermore, Adi said everything depends on the “honesty and sincerity of the government.”

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.

“Public-Private Partnership is an alternative that should be explored, bringing in the private sector under what the World Bank calls Blended Finance, are possible pathways out of this quagmire that we are in,” he added.

He urged the government to expand its revenue profile and called for an improved tax mobilisation system in the country.

“What is important is that more individuals and businesses need to be brought into the tax net. But it is like a chicken and egg situation. You can’t bring people into the tax net if you have not given them the trust and confidence that the money you are collecting would be judiciously utilised.

“We are operating in a very low trust system because the people do not trust the government. And that is because over the years we haven’t seen any impact in the taxes that they paid,” Adi added.

But, the Founder of Proshare Nigeria Limited, Mr. Femi Awoyemi, noted under the present situation, three things are at play. He listed these to include debt, tax and cost of governance. This, he described as a trilemma.

According to Awoyemi, debt looks attractive because you assume tax increases will pay for it, yet a tax increase does not reduce the size of government that created the debt in the first place.

“We have to separate our cash-strap ‘wants’ from our infrastructure funding ‘needs’. The latter will pay itself if meritoriously embarked upon. Immediate cash gaps reflect the productivity gap…that is what we should focus resources on to help policy makers in the seemingly ‘tough task’ of arranging the ‘deck on a beach,” he advised the government.

He noted that the country has a recurrent-revenue matching gap as well as a capital expenditure-revenue gap.

“The latter is outside the sovereign infrastructural needs (repairs, maintenance and new constructs), essential to build and grow the economy. 

“If this is what the government is talking about, then we are in good stead and must then ask, which part are the funding? The bankable or unbankable infrastructural projects? 

“Does the prioritisation meet the foundational needs of being an enabler? “Other than this, we may simply be discharging energy to digging our way out of a pit, hoping somehow we will tunnel out somewhere, somehow,” Awoyemi advised.

To a former bank CEO and presently Managing Director of KSBC Advisory Partners Limited, Mr. Chika Mbonu, the big picture is that economists recognise and accept that 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 . 

“And because the government doesn’t have these monies to spend it has to borrow it or even print money. So, yes the government can actually request for new loans in line my comments above especially as our economy has very high infrastructural deficits that have badly hurt the efficiency of the economy. Name any sector. 

“Now to bring it home, despite the above analysis what are the concerns here in Nigeria? We have not had a history of proper utilisation of debts in the past such that the country has entered into debt traps in the past. 

“If the debts raised are diverted or used for consumption, the above benefits would not materialise and we will be stuck with servicing the new debts at the existing revenue levels-with already more than 60 per cent dedicated to service debts,” Mbonu, who is an analyst on Arise Television added.

The Director General, Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, also noted that the growing national debt is a cause for concern.

“The opportunity cost of high debt service commitment for the economy and citizens is very high.  There is also the exchange rate risk inherent in the exposure to mounting foreign debt which we need to worry about.  As the currency depreciates, the burden of servicing foreign debt would intensify. This is a major problem with increasing the stock of foreign debt.

“This underlines the need for appropriate policy choices to attract domestic and foreign private sector capital for infrastructure financing.  The government needs to look beyond tax credit in its quest for more complimentary funding sources for infrastructure,” Yusuf added.

He advised the country to look more in the direction of equity financing, just as he called for review of the spending structure of government and the cost of governance.  

“The ballooning recurrent expenditure, in the face of declining revenue is a cause for concern. There is a need to clarify place of the new loan request in relation to the 2020 budget and the 2020 -2022 medium term expenditure framework,” he added.

To an economist and former Deputy Governor of the Central Bank of Nigeria (CBN), Dr. Obadiah Mailafia, who acknowledged that the country’s infrastructure needs are very huge, vis-à-vis its dwindling revenue, he said, “what is happening is very alarming.”

“The government inherited a low debt exposure, which was not up to $7 billion in 2015, but now it is about $84 billion. Now, you ask yourself, what has this money really been used for? We were involved in the debt negotiation for the Paris Club in 2005, that led to our exit from the Paris Club. 

“At that time, our total national debt was not more than $36 billion and even then, we were crying wolf and we said the amount was impossible and that we needed a debt relief. We negotiated and paid it off. Even though it was very painful, we succeeded in doing that. And within a space of five years, for this government to have accumulated such amount of debt is of great concern.

“For me, the principle is not whether or not government can borrow, the issue is, what are you borrowing it for? And it is not enough to make a blanket statement to say you are borrowing for infrastructure. I would want to borrowing for specific project linked funds, so that the approval would be for specific projects. 

“Don’t forget, the first we took in 2015, was a $1.3 billion IDA loan for the north-east. I have been to the north-east a couple of times, there is nothing there to show for the loan collected. Therefore, I find the whole proposition unsettling, dangerous and unpatriotic,” Mailafia said on a programme monitored on Channels Television.

According to him, the fact that Nigeria uses N5 out of every N10 it gets to service debt showed be a concern to every Nigerian.

“The IMF is clapping for you because your GDP to debt ratio is one of the lowest in West Africa. Who are you competing in West Africa? We should be competing with Brazil, Indonesia and the rest. We don’t have a debt crisis, but we have a debt problem. 

“Anybody that is using N5 out of every N10 he earns to pay back loans borrowed for consumption, is not doing the right thing. I am not saying they shouldn’t borrow, but let’s have all the records and analysis of what has been done with all previous borrowings,” he added.