Nigeria Economy | |
Nigeria Economy | |
3283 VIEWS | |
![]() |
Wednesday,
January 29, 2020 /08:54 AM / By FDC Ltd / Header
Image Credit: FDC
With the approval of N10.59 trillion budget for the
2020 fiscal year, the increasing level of Nigeria's budget deficit raises
concerns about the source of its financing and the impact of increased
government spending. Nine weeks after the presentation of the appropriation
bill to the Joint Session of the National Assembly, the President submitted a
request to the National Assembly for $22.72 billion from the 2016 - 2018 Medium
Term External Borrowing Plan.
This is the balance of the $29.9 billion first
requested in 2016. At that time, it was only partially approved due to the
absence of a borrowing plan mapping out how the debt would be channeled, and
also to reduce the possibility of a debt crisis. With the new submission, the
President reawakened concerns about Nigeria's rising debt profile.
Over the past six years, the country's debt has grown
by 214.90%, from N8.32 trillion in June 2013 to N26.2 trillion as of September
2019.2 Nigeria is a developing nation with a fastrising population of about 200
million and it is in dire need of infrastructure development to boost the
economy. From this angle, the high debt level seems justified.
However, a litany of constraints has prevented Nigeria
from achieving the necessary level of investment, despite its significant
borrowing. Examples of these constraints include: excessive government
spending, mismanaged funds and unproductive borrowing, exchange rate volatility,low
interest rate movements, inefficient loan utilization, and poor debt management
practices to name a few. As a result, the ever-increasing government spending
is yet to yield any notable results; poverty is on the rise and health and
educational facilities remain inadequate amid the fastgrowing population. Debt
service has become a significant portion of the expected revenue in 2020.
It accounted for over 60% of the government's
independent revenue in 2019.3 The total debt has been increasing ($85.39bn)4
but total factor productivity growth has been declining (-0.4%)5. This implies
that FG borrowings is hardly used for productive purposes. The debt service,
after a while becomes a burden on the government and its fiscal balance. The
government's efforts to improve productivity in the economy has yielded little
in terms of revenue and employment. In light of these, it is pertinent that FG
borrowings should be project specific, which will have a significant impact on
productivity.
Steps to manage debt
To manage Nigeria's existing debt profile, the Debt
Management Office adopted a debt strategy from 2016 to 2019 focusing on
increasing external financing and lengthening the maturity profile of the
domestic debt portfolio. The focus on external financing aims to rebalance the
public debt portfolio in favor of long-term external financing. This would
allow Nigeria to reduce its debt servicing costs and lengthen its maturity
profile. On the domestic front, it also lengthened its maturity profile by
reducing the issuance of new short-dated debt instruments and refinancing
maturing Nigerian treasury bills (NTBs) with external financing.6 The
introduction of the 30-year bond, for instance, was aimed at achieving this.
The issuance has contributed to reducing the refinancing risks of the public
debt stock. Also, the CBN's directive on OMO restrictions, which is targeted at
increasing foreign inflows and reducing domestic debt, is one such measure.
However, to achieve the desired objective, efforts should be intensified on
implementing these strategies.
Preventing a debt crisis
To tackle the issue of rising debt, Nigeria can
leverage on its capability to generate revenue internally through its abundant
natural and human resources. Focusing on sectors like agriculture and tourism,
as well as empowering its large youth population, Nigeria can diversify its
revenue base, rely less on foreign inflows and loans, reduce the debt balance
and boost domestic economic activities.
Going Forward - What can
Nigeria do?
The government's efforts to generate more revenue from
alternative sources should be intensified in order to prevent an unnecessary
debt burden on future generations. It is vital to employ proactive measures to
reduce the current debt level. Investment in key sectors should be prioritized
and incentives such as low interest capital should be provided to boost
participation and productivity. Also, providing incentives to increase
participation in agriculture should be followed by improvement in
infrastructure such as roads and irrigation facilities.
Nigeria's total borrowing as a proportion of gross
domestic product is about 21%. Compared with almost 60% for South Africa,7 this
ratio is quite low. However, acquiring more debt would weigh on this ratio
especially if it does not result in a significant boost in GDP growth.
Therefore, it is imperative that the government ensures effective utilization
of loans in order to drive productivity and increase revenue domestically.
Also, in the case that additional external debt is contracted, available
concessions should be considered while realistic and favorable terms of
repayment should be agreed upon. Doing this would allow the government to
retain enough earnings, and to invest in the empowerment of citizens, poverty
alleviation, infrastructural development and the promotion of trade to boost
the nation's economy.
Related News