The Nigerian Debt Conundrum and the Need for Automatic Stabilizers


Friday, June 16, 2017 12:00PM / Proshare Research

In the global finance narrative concerning emerging markets, the 1980’s is referred to as the lost decade; this is mainly because in that period, many developing economies reached a point where their foreign debt exceeded their earning power. Like it’s frontier market peers, Nigeria had its fair measure of the debt legacy; in the structural adjustment years.  

It is not surprising therefore, that after a decade of debt relief while concurrently experiencing one of its longest periods of prosperity, the wounds of such an era never really healed, with many traces of the damage caused by such a macroeconomic trauma evident in Nigeria.  

It is hardly surprising that the trajectory of the nation’s debt has become a source of worry. Inducing debates on how best to ginger growth while abating the double whammy scenario of relatively subtle revenue and rising misery indexes. 

This month’s Proshare confidential pin points the nature of Nigeria’s debt as largely structural. This is as a result of persistent retrogressive subsidies, high costs of political systems and fiscal leakages. 

Download Full Report HERE 

The fact that increasing debt has failed to achieve a positive correlation with growth over the years bolsters our position. A noteworthy point is that in the periods of prosperity, fiscal responsibility was slack, as the excessive crude account and federal government claims were paltry compared to revenue generated over those years.  

The recent use of automatic stabilizers has widened the deficit. Proshare in this particular report will try to provide answers to some widely repeated questions viz: 

·         Can we spend out of a recession?

·         How much headroom does fiscal policy have at this point of the cycle?

·         What is the nation’s actual debt threshold? 

Proshare took a critical look at the debt to gross domestic measure and why it cannot act as the sole sustainability indicator; at the same time a study on the nation investor’s base and its relationship with debt sustainability was highlighted. 

In this report, we pointed out that inflation and currency shocks have inflamed the external debt to gross domestic product ratio. This report goes further to proffer solutions on how best to address the debt scenario, while suggesting the optimal debt mix to avoid Nigeria getting caught up in a debt overhang. 

Improved investment in productive assets along with widening the revenue base was recognised as a measure to manage debt.  

Finally, the study hammered on the dangers of inadvertently eliminating (otherwise more efficient) private capital for public capital. Such a scenario will affect capital formation adversely. 

Download Full Report HERE 

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Previous Proshare Confidential Reports  

1.       Article IV vs. ERGP - The Third Way – May 2017

2.      Lifting The Veil Off The Financial Sector – Apr 2017

3.   Towards An Economic Model for Nigeria; Going Beyond Symptomatic Responses - The Panama Model – Mar 2017

4.      FX Utilisation in January 2017-Symptoms of An Opaque Structure Feb 2017

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