The Deputy Secretary-General of the United Nations, Mrs. Amina Mohammed, raised the alarm about the rising level of Nigeria’s debt last week. Speaking at the International Monetary Fund (IMF) and the United Nations (UN) Working Together Conversation, Mohammed, who was Minister of Environment under the current government of President Muhammadu Buhari, warned that Nigeria might return to the unhealthy debt situation of the 1980s and early 2000s. It will be recalled that Nigeria was removed from the shackles of debt burden in 2006 through a US$18 billion debt buy back arrangement that saw the country pay over US$12 billion to the London and Paris clubs under the President Olusegun Obasanjo government.
Under the debt burden, the country was forced to adopt austerity measures culminating in the Structural Adjustment Programme (SAP) that significantly weakened capacity for service delivery and social protection. In the event of cutting social spending central to SAP, state legitimacy was eroded even as the struggle over the shrinking resources of the state intensified. Ethnic and other divisions in the society deepened, leading to the outbreaks of intergroup violence, which has characterised social and political life in Nigeria ever since.
Amina Mohammed is not alone in the concern about this untoward situation. Earlier in 2017, a former Deputy Governor of the Central Bank of Nigeria, now a presidential aspirant, Professor Kingsley Moghalu, described the country’s rising debt burden as worrisome. He stressed that history showed that reliance on foreign loans failed to contribute to the economic growth and development of the country. Instead, the country became subject to creditor conditionality whenever it was unable to meet its obligations in times of recession or crisis. The IMF has also consistently warned Nigeria of the consequences of the high cost of servicing debts, which could consume substantial amounts of government revenue. Already, two-thirds of Nigeria’s tax revenue is at present applied to servicing debts annually. When a country has to spend significant parts of its revenue on huge debts, it has very little left to fund services and development. This in turn affects important social infrastructure such as health and education.
Some have argued that Nigeria’s debt-to-GDP ratio remains low at 19 per cent, which makes it safe to borrow. This is wrong given that for a developing country like Nigeria, what matters is the debt service-to-revenue ratio, which should concern every Nigerian. Some have also made a comparison of the levels of borrowing between Nigeria and the United States to support the view that Nigeria’s borrowing is minimal. This is unfortunate because it involves the metaphorical comparison of apples with oranges. 0 The United States, apart from being the largest economy in the world, is also one of the most sophisticated economies. Furthermore, most countries of the world keep their foreign assets in US securities. The current leadership, policy makers and concerned citizens of Nigeria must be wary of taking Nigeria back to the debt trap.
Statistics from the Debt Management Office (DMO) show that Nigeria’s external debt commitment rose by $11.77 bn in the last three years, from $10.32bn in June 2015 to $22.08bn as of June 30,2018. This means that the country’s external debt has grown by 114.05 per cent in the last three years. Multilateral debt made up $10.88bn or 49.28 per cent of the country’s external debt profile. Most of the increases in the last three years occurred in the area of commercial loans. Commercial foreign loans, which stood at $1.5bn as of June 30, 2015, had risen to $8.8bn as of June 30, 2018. This means that in the last three years, the country’s exposure to commercial foreign loans has risen by $7.3bn or 486.67 per cent.
Certainly, Nigeria’s debt profile is rapidly deteriorating. According to the DMO, Nigeria has moved from, “low risk of debt stress” to “a medium risk of debt distress”. There is a basis, therefore, to assume that it will move on to “high-risk of debt distress” in the near future. There is a clear and present possibility of entry into a major debt trap in the near future if urgent and adequate measures are not taken to shore up Nigeria’s revenue collection and control borrowing. In this regard, deepening revenue collection will require plugging leakages and diversifying revenue sources. Government should also provide incentives and opportunities for investors. These have to be done at all levels of government. This is the case because many states have also engaged in debt accumulation.
The debt profiles of at least 18 states have exceeded their statutory revenues by more than 200 per cent. Lagos, Osun, Cross River, Kaduna and Edo states have external debts running into billions of dollars. This is contrary to the guidelines of the Fiscal Responsibility Commission (FRC). Naturally, many of the states can hardly meet their routine obligations after servicing their monthly debts. This is a sure road to disaster and it is time to chart a new path.