Fiscal vulnerability and challenge of Nigeria’s soaring debt profile

It is no secret that the COVID-19 pandemic which occurred in 2020, induced governments all over the world to momentarily accumulate higher levels of public debt in order to invest in deficit spending and social protection programmes to tackle the anticipated economic slump.

Now, with government debts still elevated, the rise in interest rates and the strong US dollar are adding to interest costs, in turn weighing on growth and fueling financial stability risks. This is definitely having a massive impact on developing countries especially ones that want to achieve the sustainable development goals (SDGs), among other things as SDGs necessitates substantial infrastructure investments, human capital and climate change resilience.

During the period and post COVID-19, developing countries especially, Nigeria borrowed heavily from domestic and foreign sources in order to resolve the growing budget deficits to return their economies to a sustainable growth trajectory.

Traditionally, African economies have been defined by fiscal governments that have amassed large amounts of debt from external and domestic sources. This reliance on debt, as demonstrated by African economies, stems primarily from governments’ failure to fund the much-needed expenditure programmes solely through the collection of tax revenues.

As a result, African governments have been forced to borrow primarily to stimulate the economy by channeling funds from foreign investors into the domestic economy.

However, the overall cost of debt to African governments has long been a source of concern for academics and policymakers alike, with the key question being whether public debt is beneficial or detrimental to economic growth.

While it is acknowledged that public borrowing is unavoidable in African economies for the financing of fiscal activities, it is worth noting that public debt is a double-edged sword that can be beneficial if, in the long run, the investment returns fully recoup the debt or, at the very least, the resulting welfare benefits exceed the cost. If not, the outcome is a debt trap that is challenging to escape. This is exactly where Nigeria currently finds itself following revelations of a marginal increase of its public debt profile by the Debt Management Office (DMO) recently.

According to the DMO, Nigeria experienced a marginal increase of 0.61 per cent in its total public debt, reaching N87.91 trillion. This substantial rise reflects a notable 99.5 per cent year-on-year (y/y) increase from the corresponding period in 2022 when the total debt stood at N44.06 trillion.

Daily Sun understands that the comprehensive breakdown of this colossal debt, amounting to N87.91 trillion ($114.4 billion at an exchange rate of N768.76), encapsulates the combined financial obligations of the federal government, the 36 state governments, and the federal capital territory.

Diving into the details, the debt composition is dichotomised into N31.98 trillion in external debt and N55.93 trillion in domestic debt. As regards the domestic debt structure, the N50.19 trillion allocated to the federal government far surpasses the N5.74 trillion designated for the sub-national entities, including the federal capital territory.

The upswing in domestic debt, according to several economic analysts who reacted to the report, is ascribed to concerted borrowing initiatives by the federal and state governments, particularly aimed at mitigating the economic reverberations of the Petroleum Motor Spirit (PMS) subsidy removal.

It was clear to all observers that despite getting debt relief in 2005, Nigeria’s government debt has been continuously rising. The Federal Government’s borrowings (local and foreign debt) increased by around 658 per cent from N3.55 trillion to N26.91 trillion between 1999 and March 2021, indicating that successive governments have continued to borrow repeatedly.

The truth is that a nation’s capacity to expand its economy is significantly hampered by an ever-growing debt burden and this is due to the fact that debt servicing is more expensive and may become unaffordable for the debtor country, limiting its ability to achieve its fiscal and monetary goals. Government borrowing can also discourage private investment, lowering future output and profits and jeopardising the standard of living while high public debt makes pro-cyclical fiscal policy more difficult to implement, which can increase instability and weaken growth.

Analysts who spoke to Daily Sun, said recent report published by the DMO, underscores a pertinent concern regarding the prioritisation of recurrent expenditure over capital expenditure, a facet that warrants careful scrutiny for sustainable fiscal management.

They further noted that the concentration of debt within the domestic sphere raises concerns about potential vulnerabilities in local financial markets.

In an emailed note, analysts at Cowry Research, said that the high debt-to-GDP ratio limits the financial resources available for crucial infrastructure projects and social programmes, leading to a cycle of borrowing to meet funding obligations.

They argued that the gradual increase in Nigeria’s debt raises concerns about potential vulnerabilities in local financial markets.

“Notably, the disparity in debt levels among individual states is pronounced, with Lagos and Delta carrying the highest burdens and Jigawa and Kebbi having comparably lower debt levels. A critical metric, the debt-to-GDP ratio, stands at approximately 42 per cent as of the third quarter, signaling a level considered high in comparison to international benchmarks.

Moreover, this ratio surpasses recommended thresholds for emerging economies. The elevated debt-to-GDP ratio raises apprehensions about the sustainability of the debt burden and its potential repercussions on future economic growth”, they said.

Furthermore, they said, “We think that this underscores the need for careful fiscal management, diversified revenue resources and a balanced approach to borrowing for both recurrent and capital expenditures”.


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