Demystifying Nigeria’s Conscious Attempt to Keep a Low Debt Profile as Debt Servicing Becomes Worrisome

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Introduction

In a given fiscal year, when expenditure is greater than revenue, then there is the need for borrowing to cover up the deficit. This is needed so that equilibrium will be achieved as total revenue must be equal to total expenditure. Therefore, public debt is seen as a tool of fiscal policy used to stimulate the economy. It can also be referred to as the total amount of money borrowed to cover up deficit budget during a given fiscal year.

According to the Debt Management Office (DMO) National Debt Framework (2018-2022), the Nigerian government set a Country-specific Debt Limit of 25 percent for the ratio of Total Public Debt-to-GDP, up to end December, 2020. This was done in order to still remain prudent in its borrowing activities and it is 30% below the World Bank/IMF revised global threshold of 55 percent for countries in Nigeria’s peer group (Lower-Middle-Income Countries).

This research therefore compares the debt figures with global thresholds as well as with the key debt management framework of the Debt Management Office so as to know the debt path of the country going forward.

Keeping a Low Debt to GDP Ratio

In order to be prudent and keep a low solvency ratio, the Government sets a target of 25% debt to GDP ratio for itself and as shown in the ratio from 2015 to 2018, it can be seen that this target is being consciously taken into consideration as the Government seeks for fund to cover its deficit in each of the fiscal years.

Table 1: Nigeria’s Public Debt to GDP Ratio

With a nominal GDP of N94.145 trillion in 2015, the lowest debt to GDP ratio during the period under review was recorded at 13.4%. However, growth in total public debt was highest in 2016 at 37.7%. This was in defense of the economic recession that was bound to happen in 2016. As the country experienced a 2 consecutive decline in GDP (economic recession) in 2016, the Government increased its borrowing stock by 25% in 2017 majorly to create jobs, stimulate the economy and exit economic recession. By the second quarter of 2017, the country exited from economic recession, a testament to the success of the increased spending by Government to stimulate growth and the various economic policies and initiatives introduced by the Government.

With an increase in public debt by 12.2% in 2018 to N24.387 trillion and a nominal GDP growth of 12.3% in 2018, debt to GDP ratio remained constant at 19.1% in both 2017 and 2018. This could be said to be a conscious attempt to leave the debt ratio at less than 20%.

Table 2: Growth in Nigeria’s Debt Profile

It is worthy to note that Nigeria’s domestic and external composition moved from 14:86 respectively in Q2 2015 to 68:32 in Q2 2019. This is in line with the Federal Government (through the DMO) target of an optimal debt composition of 60:40 for domestic and external debt respectively, by progressively decreasing the percentage share of external financing, taking into account the need to moderate foreign exchange risk in the short to medium-term. And for a period of 6 months in 2019 (from January to June), Nigeria has borrowed a total sum of N1.314 trillion from both the domestic sources and external sources. This figure was arrived at by subtracting the December 2018 total debt figure from the June 2019 debt figure.

Chart 1: Proportion of Nigeria’s Debt Profile

That said, while Nigeria’s external debt has declined by 20% in four years, its domestic debt increases significantly by 928% during the same period. This justifies the debt composition of the country in the second quarter of 2019 as well as the need to shift from external debt financing to domestic debt financing so as to moderate the risk of foreign exchange when financing debts. Furthermore, the total debt profile of the country has increased by more than 100% in four years.

Worrisome Debt Service to Revenue Ratio

Debt servicing is the amount of money used in paying back debts and interest on debts while revenue is the amount of money generated during a given period of time. Therefore, the debt service to revenue ratio is the percentage of revenue that is used in servicing debt during a given period of time.

Table 3: Fiscal and External Debts Threshold

From the above, it can be seen that the revised global threshold for external debt service as a percentage of revenue is 15% of which a 21% and above ratio should raise alarm on the ability of a country to pay back debts in the short term. What this means is that for every one dollar a country earns, it should not spend more than 15 cents to service its debt. If it services its debt with 21 cents and above for every one dollar earned, then it is edging towards a situation of not meeting its short term obligations.

With a total revenue of N3.9 trillion and debt service of N2.2 trillion in 2018, the debt service ratio as a percentage of revenue is about 56% which is 41% higher than the global threshold. This means that for every one naira the country earns, it pays 56 kobo to service its debts. This is worrisome as the burden of a public debt is borne by the future generation. Hence, two options are available to reduce the burden on the future generation: Increase revenue generation or to reduce the percentage of public debt which is sourced externally.

Conclusion

In an attempt to be conscious on the amount of money sourced in form of debt, the Government sets a limit of 25% for itself so that it can be liquid and solvent in the short and medium term. Analysis of five years debt and GDP statistics of the country also provided empirical evidence to this and it shows the country is still on the right track. However, the revenue generated during a given fiscal year is too low to the extent that it has made debt servicing to be a worrisome issue as the burden of public debt is borne by the future generations. Therefore, if the rate of Pubic debt and debt servicing continue to grow at the same rate, then it becomes a problem in the long run and affects the ability of the country to pay back its short term debts in the long run. Hence, there is a conscious need to improving the revenue sources (by widening the tax net, improving the agricultural value chain and the solid minerals sector) of the country while maintaining a low debt profile.

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