Friday, October 25, 2019 / 1:13 PM /by FDC Ltd / Header Image Credit: FDC
When the Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, admitted that Nigeria has a revenue problem and not a debt crisis, some Nigerians nodded in agreement while others disagreed.
Nigeria's Debt Profile
In the last six years, the country's total debt has increased by 156% to N25.7trillion (as at June 2019). With every debt comes an obligation to repay both the principal and the interest agreed on the loan. According to the proposed 2020 budget, the government has earmarked N2.45trillion to service its debt, up from N2.14trillion allocated in the 2019 budget. The proposed debt service for 2020 represents 23.7% of the total expenditure of N10.33trillion.
Restructuring Nigeria's Debt
It is important to note that government borrowing is inevitable. Most nations in the world either borrow from other countries, its citizens, banks or international agencies (International Monetary Fund, World Bank etc.). Therefore, the rise in Nigeria's debt profile is not necessarily bad for the economy. Of more importance is what the proceeds are used for. The crucial aspect to address concerning Nigeria's debt should be the purpose and types of borrowed funds.
One way to restructure Nigeria's debt is for the country to shift towards more concessionary debts as these types of loans usually have longer repayment periods, lower interest rates (e.g. 2% pa for 30 years) and lenders are more open to debt restructuring. In addition, borrowed funds must be project specific and not for general purposes. This is because borrowed funds used for infrastructure is able to have a positive multiplier effect and improve Nigeria's ability to repay the loan by the end of the loan agreement.
Nigeria's Revenue Profile
Since the 1950s when oil was discovered in Nigeria, the country's revenue profile has been largely dominated by oil revenue. Crude oil still accounts for approximately 78% of the country's total export earnings in spite of the FGN's diversification efforts. A huge exposure to the international oil market increases Nigeria's vulnerabilities to exogenous shocks. In 2020, several analysts are betting on an average oil price below $60pb owing to oil demand growth concerns and trade tensions. With a dim oil price outlook, Nigeria's fiscal position and external balance will be threatened.
To reduce its reliance on oil revenue, there has been an increased effort by the FGN to boost its tax revenue with the proposed hike in VAT, communications tax amongst others. Whilst this mounts pressures on the average Nigerian consumer and threatens their disposable income, the increase in Nigeria's non-oil revenue is important to fund the country's ambitious expenditure and investment programmes scheduled for the near to long term.
Addressing Nigeria's revenue problem
The days of over reliance on oil revenues for Nigeria are slowly coming to an end. With OPEC hinting at deeper output cuts of it member countries, Nigeria's output quota could likely be reviewed downwards. If this happens, Nigeria's oil revenue in 2020 would reduce. The intensified drive of the FGN to boost its non-oil revenue should be commended. However, the drive would have limited impact without addressing some structural challenges. First, the attempt of the FGN to introduce creative ways to raise its non-oil revenue would be a futile effort without blocking inherent leakages within the system. Second, increasing the tax rate is not nearly enough without improving tax administration and collection.