Nigeria’s rising debt profile raises sustainability concerns,economist tells FG

Nigeria’s rising debt profile raises sustainability concerns-Expert

An economist and former Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Dr Muda Yusuf ,  has expressed worries about the Nigerian rising debt profile, saying that the capacity to service the current stock of debt raises  even more serious sustainability concerns.

The immediate past Director-General of LCCI, who spoke exclusively to the Oracle News on Saturday, said that “although the government tends to argue that the conditions were not a debt problem, but a revenue challenge. 

“But the truth, he said, is that debt becomes a problem if the revenue base is not strong enough to service the debt sustainably as it invariably becomes a debt problem.” 

The growing national debt is a cause for concern as public debt grew from N12.6 trillion in 2015 to N33.1 trillion as at March 2021, an increase of 163%.;although 12.45% of this are debts owed by the state governments and the FCT.

 The country’s capacity to service the current stock of debt raises serious sustainability concerns. For instance, the debt service provision in the 2021 budget was a whooping N3.3 trillion, whereas the total budgeted revenue was N6.6 trillion and capital budget was N3 trillion, implying  that the amount budgeted for debt service was 110% of capital budget and 50% of retained Federal Government revenue.

 Meanwhile, the actual revenue has historically been less than budgeted revenue, meaning that the debt service to actual revenue ratio would be much higher.

For instance, recent report from the Federal Ministry of Finance indicates that as at May 2021, actual retained revenue of the Federal Government was N1.84 trillion while actual debt service was N1.80 trillion, meaning that 98% of revenue was committed to service debt as at May 2021, a situation which Dr Yusuf said certainly not a healthy fiscal position and should be a cause for concern.

“With the weak revenue performance and the growing recurrent expenditure, the capacity to fund capital projects has become severely constrained. The opportunity costs of high debt service for the economy and citizens are very high as the economy is denied desired funding for critical social and economic infrastructure projects which are needed to build a globally competitive economy and advance the welfare of citizens.

“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 debts would intensify, especially when productivity in the economy remains low. This is a major concern with spike in the stock of foreign debt,” he said.  

According to the former DG of LCCI,”commercial debts are the costliest components of external debt, and the Euro bond is one of such debts. The less commercial debts we incur, the better for debt sustainability. Concessionary debts are generally much better. These are debts from multilateral institutions such as the African Development Bank, the World Bank, IMF, and Bilateral debts.

Their interests’ rates are extremely low, and their tenures are quite long. Most often, these concessionary debts are specific to projects which reduces the risk of inappropriate public expenditure. This Fiscal Responsibility Act underscores this position.”

It makes sense for the government to take advantage of the new window of historic opportunity for concessionary funds of $650 billion offered by the IMF under the Special Drawing Rights support for member countries, especially those heavily inflicted by the Covid pandemic.

  This IMF facility should, as much as possible, be used to substitute the Euro bonds because of its highly concessionary nature.

All these underline the imperative of reforms to reduce recurrent expenditure, especially the cost of governance. It is critical as well to ensure appropriate policy choices to attract equity domestic and foreign private sector capital for economic and social infrastructure financing. 

Reducing the burden of debt and the risk of a debt trap also demands appropriate polices to incentivize private investments. Investment growth would boost economic growth, enhance the growth of revenue, and reduce the prospects of fiscal deficit and consequent borrowing.  Creating an enabling environment for private investment is therefore very critical to reducing the burden of public debt.

Economic reforms are imperative to ease the fiscal burden of government in the provision of infrastructure. Bankable infrastructure projects should be identified for private sector investment. But this should come with the right incentives, especially around the minimization of risk exposure by the private sector.

Issues of quality of government spending and appropriate expenditure priorities are crucial to the creation of fiscal sustainability by the government. There is need to address corruption risks in government projects and general government expenditure as well.

Dr Yusuf said “what is needed is the political will to cut expenditure and undertake reforms that could scale down the size of government reduce governance cost and ease the fiscal burden on government.

“It is important to ensure that the debt is used strictly to fund capital projects that would strengthen the productive capacity of the economy.  This is position of the Fiscal Responsibility Act.

“Additionally, emphasis should be on concessionary financing, as opposed to commercial debts which are typically very costly.

“It is imperative for the country to operate as a true federation which it claims to be.  The unitary character of the country is making it difficult to unlock the economic potentials of the subnationals.  It is perpetuating the culture of dependence on the federal government.”