Nigeria’s debt-GDP ratio is relatively low; its debt is equivalent to just 19% of GDP, compared to 58% and 56% in Ghana and South Africa, respectively.
Nigeria’s debt servicing-revenue ratio is very high; its debt repayments gulped 62% of revenues in 2018, so for every ₦1 the government earned, 60 kobo was used to repay debt.
A million and one conclusions have been drawn from these two accepted facts, with the most prominent being that Nigeria does not have a debt problem, it has a revenue problem.
Today, we show that Nigeria may not have a debt problem, but its debt is causing a lot of problems.
Nigeria heads towards a debt crisis
How did we get here?
In 2005, Nigeria owed almost $31 billion to the Paris Club—an informal group of wealthy lenders including the United Kingdom, France, and Japan—and had a debt-GDP ratio well above 50%.
Later that year, the Obasanjo administration successfully negotiated a deal that saw Nigeria pay down just $12 billion of this debt, giving the country a near-clean slate as debt-GDP ratio fell below 10%.
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The other problem with sustained naira borrowing is that government borrowing crowds out private sector borrowing
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What happened after that?
The government was relatively well-behaved: external debt increased from ₦451 billion in 2006 to ₦690 billion in 2010, with some of this due to currency depreciation. However, domestic borrowing was more reckless, rising from ₦1.7 trillion in 2006 to ₦4.6 trillion in 2010.
The 2010s were much worse. Total debt rose by 48% in 2011, 18% in 2012, and 10% in 2013. More recently, Nigeria’s debt grew by 38% in 2016 and 25% in 2017.
Put differently, total debt was ₦5.2 trillion at the end of 2010 and had more than doubled just four years later to ₦11.3 trillion. Another four years later, total debt had doubled again to ₦22.5 trillion.
So much for doing better after debt forgiveness.
And for those thinking it, currency depreciation can only explain a bit of this debt pileup. External debt accounted for 15% of Nigeria’s debt in 2010, and now it accounts for 30%. But Nigeria has also borrowed over $8 billion (about a third of all external debt) in the last three years alone.
Whichever way you look at it, this increase in debt has been intentional.
Naturally, this has led to high interest payments—the more you borrow from people, the more you must pay back in return. In 2010, the Federal Government spent ₦350 billion on interest payments on domestic debt. It spent ₦1.6 trillion just from January 2018 to September 2018.
While all this has happened, revenues have not budged. In 2012, the FG had retained revenues of ₦3.3 trillion; in 2017, retained revenues were ₦3.5 trillion.
How come?
The 2014 oil price crash decimated Nigeria’s revenues (oil accounted for 75% of gross earnings in 2014) while the subsequent economic slowdown and the government’s failure to reform Nigeria’s tax culture have caused non-oil revenues to plateau.
So, we borrowed a lot more just when we were earning less. We must have borrowed for a good reason, right?
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Naira-denominated debt accounts for 70% of Nigeria’s debt and that’s why we can be so sure that Nigeria is not going to default on its debt. _____________________________________________________________________
What did Nigeria borrow for?
Everything.
The rhetoric is that Nigeria has been borrowing for capital expenditure but this only tells half the story.
Yes, debt has been used to fund capital expenditure (capex), evidenced by the rise in capex disbursed to government ministries from ₦744 billion in 2012 to ₦1.7 trillion in 2018. Furthermore, debt has sometimes been directly tied to capital projects, such as with the Sovereign Sukuk and Diaspora bond.
That said, we have also borrowed to fund day-to-day government operations. How do we know this? Compare what the government earns to what it uses for recurrent expenses. In 2018, the government earned ₦3.5 trillion but spent ₦5.4 trillion on recurrent expenses—the difference was funded with debt.
Is the debt worth it?
Well-directed capital expenditure is super useful for developing countries, but it is difficult to assess the impact of recent capital spending in Nigeria. This is partly because the benefits of infrastructure investment take many years to appear, but also because there has been little effort made to evaluate capital expenditure in Nigeria.
For capital expenditure to make a difference, the allocated funds first need to get to the people executing the project (far from a formality in Nigeria), and the funds must be spent well. Recently constructed schools should not have caved-in roofs after a few years, roads should remain pothole-free for a long time, and power generating plants should actually generate and send power.
Even without a full evaluation, we can use data to indirectly gauge the efficacy of capital expenditure as investments in infrastructure should eventually show up on the numbers. For example, capital investments in education should result in fewer out-of-school children, road investments should lead to lower transport costs and few accidents, and investments in the national grid should mean fewer blackouts.
As we wait for data and experience to tell us if Nigeria’s debt binge has been worth it, we address the pertinent issue of what happens next.
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Well-directed capital expenditure is super useful for developing countries, but it is difficult to assess the impact of recent capital spending in Nigeria. _____________________________________________________________________
The costs of government debt
Nobody really expects Nigeria to default on its debt or require debt forgiveness anytime soon. In fact, the problem is that Nigeria will likely continue to accumulate and pay off debt for the next few years, to the detriment of the economy.
Here’s why.
Nigeria will always repay naira debt
Naira-denominated debt accounts for 70% of Nigeria’s debt and that’s why we can be so sure that Nigeria is not going to default on its debt. There are two main reasons for this.
The first is that a sovereign state admitting that it can no longer meet its local currency debt obligations is the universal trigger for economic apocalypse and governments do all they can to avoid it.
The second is that the central bank can always foot the bill by (effectively) printing money for the government to use in debt repayments.
Of course, this is problematic as sustained central bank financing (or printing money) wreaks havoc on the local currency. As Nigeria already struggles with double-digit inflation and currency pressure, we risk following the path charted by the likes of Argentina and Zimbabwe.
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Rather, the problem with spending 62% of revenues on debt repayment is that you only have 38% to spend on the rest of the economy.
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If the government borrows, no one else will
The other problem with sustained naira borrowing is that government borrowing crowds out private sector borrowing. As we have argued in the past, one reason large financial institutions refuse to lend to smaller businesses is that they would rather put their money in government debt giving them juicy rates.
Even as the Central Bank of Nigeria pushes for banks to lend more to small businesses, it has refused to address this, which comes as no surprise as commercial banks hold over 30% of Nigeria’s outstanding domestic bonds. Driving them out of the market would put the Federal Government in a very uncomfortable place.
So, we can disregard the posturing on increasing access to credit in Nigeria. The government has a simple choice: borrow or allow someone else to.
The opportunity cost of dollar debt
In 2014, Nigeria owed $9.8 billion (₦1.6 trillion) to the external market. Between 2014 and 2018, the FG raised over $8 billion in the Eurobond market. There is little reason to believe that Nigeria will not be able to make its interest or principal repayments—total external debt is still less than oil earnings, and the debt is spread as far into the future as 2038.
Once again, the worry is not that Nigeria will default, but that all this debt comes at a steep price to the economy.
The usual refrain is that external borrowing is not risky for Nigeria since we can simply make the interest payments with our dollar earnings. This may be true, but it ignores the principle of opportunity cost.
When the naira depreciates, the FG may be paying the same dollar amount in interest, but the opportunity cost of that interest payment is higher. The opportunity cost of a $10 million interest payment is a lot higher when $10 million is equivalent to ₦10 billion than when it is equivalent to ₦1 billion.
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Once again, the worry is not that Nigeria will default, but that all this debt comes at a steep price to the economy.
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In conclusion
Nigeria’s debt is not unusually large; we will be able to pay it off. And our concern with a debt servicing-revenue ratio of 62% is not that we think it shows the government is becoming involvement. Rather, the problem with spending 62% of revenues on debt repayment is that you only have 38% to spend on the rest of the economy.
We aren’t concerned that the government wouldn’t be able to pay off its debt; we are worried that is all they will do.
Stears Business
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