Nigeria is a resource-rich African country with a population of over 200 million people. Despite the abundance of natural resources, the country has a history of economic instability and a high level of poverty. One of the major challenges that Nigeria has faced in its development journey is its debt burden. Nigeria’s debt burden is poised to soar 50% after the nation’s parliament approved President Muhammadu Buhari’s proposal to convert 22.7 trillion naira ($49 billion) of loans from the central bank into bonds.
The lawmakers’ adoption of the idea is expected to drive the West African nation’s official debt-to-gross domestic product ratio to approach a 40% ceiling established by the administration. This article examines Nigeria’s debt management practices and their impact on the country’s economy and development.
Nigeria’s Debt Profile
Nigeria’s debt profile has been a matter of concern for many years. According to the Debt Management Office (DMO), Nigeria’s total public debt stock as of December 2020 was $84.57 billion, representing about 21.61% of the country’s Gross Domestic Product (GDP). The debt stock comprises both domestic and external debts, with the external debt component accounting for about 37% of the total debt stock.
Nigeria’s external debt stock has been on the rise in recent years, with the country borrowing heavily to fund its infrastructure projects and other developmental initiatives. In 2020, Nigeria’s external debt stock stood at $33.18 billion, representing a 15% increase from the previous year. The increase in external debt has raised concerns about the country’s debt sustainability and its ability to repay its debts.
Nigeria’s debt profile is the total amount of money that the country owes to domestic and international creditors. According to the Debt Management Office (DMO), Nigeria’s total public debt stock as of March 2021 was N33.107 trillion or approximately $87.24 billion. The debt stock comprises both domestic and external debts, with the external debt component accounting for about 36% of the total debt stock.
Nigeria’s external debt stock has been on the rise in recent years, with the country borrowing heavily to fund its infrastructure projects and other developmental initiatives. In 2020, Nigeria’s external debt stock stood at $33.18 billion, representing a 15% increase from the previous year. The increase in external debt has raised concerns about the country’s debt sustainability and its ability to repay its debts.
The country’s debt profile is made up of both long-term and short-term debts. The long-term debts are mostly obtained from multilateral institutions such as the World Bank, International Monetary Fund (IMF), African Development Bank (AfDB), and the Islamic Development Bank (IDB), among others. These loans are usually for a period of between 10 and 30 years and are obtained at concessionary rates with lower interest rates and longer repayment periods.
On the other hand, short-term debts are usually obtained through the issuance of treasury bills and bonds, commercial papers, and other instruments with a maturity period of less than one year. These debts are used to finance the country’s budget deficit, which has widened in recent years due to declining oil revenues.
Nigeria’s debt profile has been a matter of concern for many years, with the high debt service payments putting pressure on the country’s fiscal resources. In 2020, the country’s debt service payment stood at N3.27 trillion, representing about 23% of the country’s total budget for the year. This means that a significant portion of the country’s revenue is being used to service its debts, leaving little funds for social services and developmental projects.
The high debt burden has also led to a decline in the country’s creditworthiness, making it more difficult for the country to access international capital markets. This has also made it more difficult for the country to attract foreign direct investment, which is critical for the country’s economic development.
Recently The senate authorised the sum of N22.7 trillion that was spent by the executive arm of government without the initial consent of the national assembly. The upper legislative chamber approved the proposal on Wednesday after Ibrahim Gobir, senate leader, delivered a report. Gobir said some of the recipients of the monies are the office of the accountant-general of the federation, the minister of foreign affairs (ECOWAS national unit), Nigeria Bulk Electricity Trading, Azura Power West Africa, Niger Delta Power Holding Company, and Accugas Limited. The N22.7 trillion is money borrowed by the government from the Central Bank of Nigeria (CBN) through the “ways and means advances”.
President Muhammadu Buhari had urged the Senate to ratify the money in December 2022, but several senators — largely of the opposition — kicked against it. They required that documents of what the monies were spent on be submitted before approval was given to his request. “The ways and means advances by the Central Bank of Nigeria to the federal government has been a funding option to the federal government to cater for short-term or emergency finance to fund delayed government-expected cash receipt of fiscal deficit,” Buhari had said in his letter to the national assembly last year.
Following the outcry the request produced in the senate, Ahmad Lawan, senate president, ordered Gobir to lead an ad hoc committee to liaise with relevant ministries, departments and agencies (MDAs) on the spending. Although the Gobir-led panel was intended to have turned in its findings in January, it was only able to do so at Wednesday’s hearing. Meanwhile, in January 2023, TheCable claimed that Buhari urged the senate to securitise the N22.7 trillion Ways and Means loan. Securitisation is the practice of grouping various types of financial instruments and selling them as bonds to investors. Addressing the Senate, Buhari said it would cost the federal government nearly N1.8 trillion in interest if the national assembly failed to approve N22.7 trillion in extra-budgetary spending.
Speaking on the subject, Patience Oniha, director-general of DMO, said the securitisation of the ways and means advances would enable the agency to incorporate the debt in the public debt stock, hence, boosting debt transparency. Using the existing public debt stock of N44 trillion (at the time) as a baseline, Oniha anticipated that the country’s public debt would approach N77 trillion if the CBN loan was added. The House of Representatives has still sat on the topic, but approval from the House might take Nigeria’s national debt over the existing level of N46.25 trillion.
Debt Management Practices
The Nigerian government has put in place various debt management practices to manage the country’s debt burden. One of the key strategies is to ensure that the debt is sustainable and used for productive purposes. The government has also adopted a medium-term debt management strategy to guide its borrowing decisions and debt management practices.
The Debt Management Office (DMO) is the government agency responsible for managing Nigeria’s debt. The agency is tasked with ensuring that the country’s debt is sustainable and that borrowing is done at favourable terms. The DMO also manages the country’s debt service payments and ensures that the country meets its debt obligations.
Impact on the Economy and Development
Nigeria’s debt burden has had a significant impact on the country’s economy and development. The high debt service payments have put pressure on the country’s fiscal resources, leading to a reduction in the amount of funds available for social services and developmental projects. The high debt service payments have also led to a decline in the country’s creditworthiness, making it more difficult for the country to access international capital markets.
The high debt burden has also led to a decline in the country’s foreign exchange reserves, making it more difficult for the country to manage its exchange rate. Nigeria’s exchange rate has been volatile in recent years, with the value of the Naira depreciating against major currencies. The depreciation of the Naira has led to an increase in the cost of imports, which has had a significant impact on the country’s inflation rate.
The high debt burden has also led to concerns about the country’s debt sustainability. The World Bank has warned that Nigeria’s debt sustainability is at risk and that the country needs to take urgent action to reduce its debt burden. The high debt burden has also raised concerns about the country’s ability to finance its budget deficit, which has widened in recent years due to declining oil revenues.
Nigeria has implemented several measures to reduce its debt burden in recent years. These measures have been aimed at managing the country’s debt profile, reducing borrowing costs, and improving the efficiency of debt management. Here are some of the ways that Nigeria has reduced its debt:
- Debt Restructuring: One of the ways Nigeria has reduced its debt is by restructuring its external debt. This involves renegotiating the terms of the debt with creditors to reduce interest rates and extend the repayment period. In 2005, Nigeria secured debt relief under the Highly Indebted Poor Countries (HIPC) initiative, which saw the country’s external debt reduced by about $18 billion. This provided some relief to the country’s debt burden and helped to improve its debt sustainability.
- Debt Repayment: Another way Nigeria has reduced its debt is by repaying some of its outstanding debts. The country has used part of its oil revenue to repay its debts, which has helped to reduce the debt burden. For instance, in 2019, Nigeria repaid $1.9 billion in maturing Eurobonds, which helped to reduce its external debt.
- Increased Revenue Generation: Nigeria has also taken steps to increase its revenue generation to reduce its reliance on borrowing. The country has implemented various measures to improve tax collection and increase non-oil revenue sources. This has helped to increase the country’s revenue base and reduce the need for borrowing.
- Effective Debt Management: Nigeria has also implemented effective debt management practices to reduce its debt. The Debt Management Office (DMO) has been tasked with managing the country’s debt and ensuring that borrowing is done at favourable terms. The DMO has also been involved in issuing bonds to refinance maturing debts and reduce borrowing costs.
- Diversification of the Economy: Nigeria has also taken steps to diversify its economy to reduce its reliance on oil revenue. The country has identified several sectors, such as agriculture, manufacturing, and services, that have the potential to drive economic growth and reduce the need for borrowing. The government has implemented policies to support these sectors and attract foreign investment to diversify the economy.
- Promotion of Public-Private Partnerships (PPPs): Nigeria has also promoted the use of PPPs to finance infrastructure projects. This involves partnering with private sector companies to finance, build, and operate public infrastructure projects. PPPs have the potential to reduce the government’s debt burden and improve the efficiency of infrastructure delivery.
Nigeria’s debt management practices have significantly impacted the country’s economy and development. While the government has put in place various strategies to manage the country’s debt burden, the high debt service payments have put pressure on the country’s fiscal resources, reducing the number of funds available for social services and developmental projects. The high debt burden has also led to concerns about the country’s debt sustainability and its ability to finance its budget deficit. To ensure sustainable development, the Nigerian government must adopt more effective debt management practices and ensure that borrowing is done at favourable terms.
Sources
- https://www.vanguardngr.com/2023/05/how-world-bank-creates-debt-burden-in-nigeria-2/
- https://businessday.ng/business-economy/article/nigerias-debt-burden-continues-its-unrelenting-surge/
- https://www.bloomberg.com/news/articles/2023-05-03/nigeria-agrees-to-convert-49-billion-owed-central-bank-to-bonds#xj4y7vzkg
- https://www.thecable.ng/breaking-senate-approves-buharis-n22-7trn-extra-budgetary-spending-request
- https://punchng.com/26-days-to-go-outrage-as-senate-approves-buharis-n22-7tn-extra-budgetary-spending/
