Nigeria’s Rising Debt Burden and How to Boost Revenue

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Summary: With the approval of the N10.59 trillion budget for the 2020 fiscal year and the increasing level of the budget deficit, Nigeria’s debt profile is on the increase; a significant growth of 214.90% in just six years. This is quite alarming considering that the annual budgetary allocations have not been able to yield the desired result courtesy of challenges such as excessive government spending, mismanagement of funds, exchange rate volatility, low-interest rate movements, inefficient loan utilization, and poor debt management practices. This has to stop, and to stop this, government has to avoid placing a debt burden that is not needed on future generations, the government’s efforts to raise more revenue from alternative sources should be stepped up.

With the approval of N10.59 trillion budget for the 2020 fiscal year, the increasing level of Nigeria’s budget deficit raises concerns about the source of its financing and the impact of increased government spending. Nine weeks after the presentation of the appropriation bill to the Joint Session of the National Assembly, the President submitted a request to the National Assembly for $22.72 billion from the 2016 – 2018 Medium Term External Borrowing Plan.

This is the balance of the $29.9 billion first requested in 2016. At that time, it was only partially approved due to the absence of a borrowing plan mapping out how the debt would be channeled, and also to reduce the possibility of a debt crisis. With the new submission, the President reawakened concerns about Nigeria’s rising debt profile.

Over the past six years, the country’s debt has grown by 214.90%, from N8.32 trillion in June 2013 to N26.2 trillion as of September 2019.2 Nigeria is a developing nation with a fastrising population of about 200 million and it is in dire need of infrastructure development to boost the economy. From this angle, the high debt level seems justified.

However, a litany of constraints has prevented Nigeria from achieving the necessary level of investment, despite its significant borrowing. Examples of these constraints include: excessive government spending, mismanaged funds and unproductive borrowing, exchange rate volatility,low interest rate movements, inefficient loan utilization, and poor debt management practices to name a few. As a result, the ever-increasing government spending is yet to yield any notable results; poverty is on the rise and health and educational facilities remain inadequate amid the fastgrowing population. Debt service has become a significant portion of the expected revenue in 2020.

It accounted for over 60% of the government’s independent revenue in 2019.3 The total debt has been increasing ($85.39bn)4 but total factor productivity growth has been declining (-0.4%)5. This implies that FG borrowings is hardly used for productive purposes. The debt service, after a while becomes a burden on the government and its fiscal balance. The government’s efforts to improve productivity in the economy has yielded little in terms of revenue and employment. In light of these, it is pertinent that FG borrowings should be project specific, which will have a significant impact on productivity.

Steps to manage debt

To manage Nigeria’s existing debt profile, the Debt Management Office adopted a debt strategy from 2016 to 2019 focusing on increasing external financing and lengthening the maturity profile of the domestic debt portfolio. The focus on external financing aims to rebalance the public debt portfolio in favor of long-term external financing. This would allow Nigeria to reduce its debt servicing costs and lengthen its maturity profile. On the domestic front, it also lengthened its maturity profile by reducing the issuance of new short-dated debt instruments and refinancing maturing Nigerian treasury bills (NTBs) with external financing.6 The introduction of the 30-year bond, for instance, was aimed at achieving this. The issuance has contributed to reducing the refinancing risks of the public debt stock. Also, the CBN’s directive on OMO restrictions, which is targeted at increasing foreign inflows and reducing domestic debt, is one such measure. However, to achieve the desired objective, efforts should be intensified on implementing these strategies.

Preventing a debt crisis

To tackle the issue of rising debt, Nigeria can leverage on its capability to generate revenue internally through its abundant natural and human resources. Focusing on sectors like agriculture and tourism, as well as empowering its large youth population, Nigeria can diversify its revenue base, rely less on foreign inflows and loans, reduce the debt balance and boost domestic economic activities.

Going Forward – What can Nigeria do?

The government’s efforts to generate more revenue from alternative sources should be intensified in order to prevent an unnecessary debt burden on future generations. It is vital to employ proactive measures to reduce the current debt level. Investment in key sectors should be prioritized and incentives such as low interest capital should be provided to boost participation and productivity. Also, providing incentives to increase participation in agriculture should be followed by improvement in infrastructure such as roads and irrigation facilities.

Nigeria’s total borrowing as a proportion of gross domestic product is about 21%. Compared with almost 60% for South Africa,7 this ratio is quite low. However, acquiring more debt would weigh on this ratio especially if it does not result in a significant boost in GDP growth. Therefore, it is imperative that the government ensures effective utilization of loans in order to drive productivity and increase revenue domestically. Also, in the case that additional external debt is contracted, available concessions should be considered while realistic and favorable terms of repayment should be agreed upon. Doing this would allow the government to retain enough earnings, and to invest in the empowerment of citizens, poverty alleviation, infrastructural development and the promotion of trade to boost the nation’s economy.

Key Recommendation: Nigeria should use its abundant natural and human capital to raise revenue internally to address its rising debt. Nigeria will diversify its revenue base, rely less on foreign inflows and loans. It should also reduce its debt balance, and improve domestic economic activities by focusing on agriculture, tourism, and improving its youth population. To drive production and raise revenue domestically, the government must ensure that loans are used effectively.

Source: ProShare

Keywords: Debt burden, Investment in key sectors, Effective utilization, Economic growth

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