KEY POINTS
- Nigeria’s debt-to-GDP ratio is 50 percent, below the 55% IMF threshold, but debt servicing strains fiscal stability.
- Over 147 percent of retained revenue was spent on debt servicing in 2024, highlighting fiscal pressure.
- Strategic spending, revenue diversification, and concessional loans are crucial for sustainable debt management.
Nigeria is Africa’s largest economy and has experienced significant growth and challenges in its fiscal landscape.
As an emerging economy, a significant factor in its growth is a pile of debt that keeps sparking discussions and controversies.
Borrowing has played a key role in financing essential infrastructure and development initiatives, but the growing debt levels have ignited discussions regarding its sustainability.
Arguably, no country in the world is sustainable without considerable debt. Superpower nations like the United States, China, and the UK, among others, are not debt-free.
For instance, the United States has the most debt in the world; its federal debt increased from $394 billion in 1924 to $35.46 trillion in 2024.
While debt can drive growth and infrastructure advancement, excessive borrowing presents considerable threats to fiscal stability and economic viability.
Overview of Nigeria’s debt profile
Nigeria’s debt history shows a complicated path characterized by periods of borrowing, restructuring, and difficulties in repayment.
Starting in the 1970s, the nation’s borrowing surged amid the oil boom to support infrastructure and economic growth (IMF, 2024).
However, poor management and falling oil revenues during the 1980s resulted in a major debt crisis (IMF, 2024).
By the early 2000s, Nigeria had a debt exceeding $30 billion to foreign lenders. A significant development occurred in 2005 when the Paris Club approved a debt relief agreement for Nigeria, eliminating $18 billion in debt in return for a $12 billion payment.
Nigeria’s Domestic Debt, which includes debts of the FGN and Sub-Nationals, increased by N23. 92 trillion in Q2 2023, from N30. 21 trillion in Q1 2023 to N54. 13 trillion in Q2 2023 (Debt Management Office Nigeria, 2023)
Nonetheless, borrowing resumed in the following years, motivated by infrastructure demands, reduced revenue, and economic shocks like the global oil price drop.
Recently, Nigeria’s debt has soared to unprecedented heights, raising concerns about debt servicing and fiscal sustainability in economic discussions.
As at June 30th 2024, total debt stock has ballooned to 134,297,672.16 million ($91,347.09 million) according to the Debt Management Office (DMO).
Nigeria’s debt-to-GDP ratio is approximately 50 percent, below the 55 percent threshold recommended by the International Monetary Fund (IMF) for developing economies.
The consequences of increasing debt
A significant portion of Nigeria’s income is dedicated to servicing its debt. In the first nine months of 2024, Nigeria spent N8.94tn on debt servicing, a 56.8 percent rise from N5.69tn in 2023.
Debt servicing consumed 147 percent of retained revenue, up from 132 percent in 2023, highlighting the fiscal strain as nearly half of the total expenditure was dedicated to debt costs.
In August 2000, during a campaign for debt relief, Nigerian President Olusegun Obasanjo highlighted the severe impact of compound interest on the nation’s debt. He stated:
“All that we had borrowed up to 1985 or 1986 was around $5 billion, and we have paid about $16 billion, yet we are still being told that we owe about $28 billion.”
He continued, “That $28 billion came about because of the injustice in the foreign creditors’ interest rates. If you ask me what is the worst thing in the world, I will say it is compound interest.”
This statement highlights the financial strain of debt servicing as it plunges the nation into acute debt.
Also, reliance on external loans, particularly from bilateral lenders such as China, generates worries regarding the possible forfeiture of strategic assets or economic independence if Nigeria does not fulfill its commitments.
Balancing growth with debt sustainability
Despite these difficulties, borrowing has been essential in funding Nigeria’s growth. Major infrastructure initiatives, including the Lagos-Ibadan railway and the Second Niger Bridge, have been financed via loans. Nonetheless, attaining this balance necessitates strategic actions:
Boosting income creation
Nigeria’s tax-to-GDP ratio stood at 9.4 percent in 2023, one of the lowest in the world. Enhancing tax collection effectiveness and broadening the tax base can increase non-oil income.
Promoting growth in non-oil industries like agriculture, technology, and manufacturing can lessen dependence on oil income.
Rationalizing spending
Financial discipline is crucial for effectively managing debt. Tackling leakages, corruption, and inefficiencies in government expenditure can release resources for essential sectors.
Directing borrowed capital towards impactful initiatives with quantifiable benefits can promote sustainable growth.
Improving debt management
Securing loans under advantageous conditions and utilizing them for constructive aims can reduce debt-related risks. Taking a cue from Rwanda’s low debt profile with a debt-to-GDP ratio of 32.9 percent, Rwanda mostly takes concessional debt for profitable investments.
Nigeria utilizing concessional loans featuring low-interest rates and extended repayment terms to lower debt servicing expenses.
Enhancing public-private collaborations (PPCs)
Instead of depending exclusively on loans, the government can involve private investors to fund infrastructure projects via PPPs. This method distributes risks and lessens the financial load.
Reinforcing monetary policy
The Central Bank of Nigeria (CBN) should synchronize monetary policies with fiscal objectives to stabilize the naira and regulate inflation.
The path forward
Nigeria’s debt crisis highlights the need for a comprehensive strategy for fiscal management.
Although borrowing is crucial for growth, an overdependence on debt may threaten economic stability.
Through diversification of revenue streams, strengthening fiscal management, and embracing creative financing approaches, Nigeria can pave a sustainable path ahead.
As the country faces these obstacles, decision-makers need to find a careful equilibrium between addressing urgent developmental requirements and protecting future generations from the consequences of unsustainable debt.
The path forward is challenging, yet with courageous changes and a dedication to financial prudence, Nigeria can utilize its debt as an instrument for advancement instead of a burden.
The decisions taken now will shape whether the nation’s debt story evolves into a tale of change or a cautionary lesson.
