In 5 Months, For Every ₦100 Earned, Nigeria Spent ₦72 on Debt Servicing

Between January to May 2020, Nigeria spent ₦1.07 trillion on debt servicing. This is revealed in the 2021-2023 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP)  presentation of the Minister of Finance, Budget and National Planning, Ms. Zainab Ahmed.  

The 2021-2023 MTEF/FSP is the pre-budget statement that provides the framework for the development of the 2021 Budget. It is framed against the backdrop of a challenging global economic uncertainty as well as domestic factors. 

The presentation also shows that the federal government retained revenue was ₦1.48 trillion. Out of which oil revenues generated was worth ₦701.6 billion while non-oil tax revenues totalled ₦439.32 billion. Other revenues amounted to N339.51 billion, of which Independent revenue was ₦80.22 billion. According to the presentation, recoveries and Stamp duty collected during the period were yet to be booked in the fiscal accounts. 

Source:2021-2023 MTEF/FSP

By implication, Nigeria’s serviced debt (₦1.07 trillion) from January to May 2020 is 72 percent of the retained revenue. Thus, for every ₦100 earned, the FG spends ₦72 in servicing debt. As such the country suffers from the poor generation of revenue and amidst the huge public debt repayment. 

The fiscal storm may not recede anytime soon. As of Q1 2020, Nigeria owes a total of ₦28.63 trillion in public debts. 

Also, in the next four years, the country will be paying back ₦100 billion with interest at 16.47 percent to various investors on its first Sukuk Bond offering. Moreover, the country is still out to borrow and still owes China about $3.1 billion, more than 10% of the $27.6 billion external debt stock as at last count. This amount of China loan will be serviced until around 2038, which is the maturity date for the last loan obtained in 2018. 

Furthermore, the 2021-2023 MTEF/FSP reveals that the FG would have to source for ₦5.16tn to make up for its projected fiscal deficit in 2021. It has projected to spend ₦11.86 trillion against revenue of N6.98 trillion.  This implies that the federal government will have to contend with a fiscal deficit of  ₦5.16 trillion in the year ahead. It is predicted that more than 50% of the projected fiscal deficit will be financed by loan packages. The multiplier effect of this is increased public debt

Nigeria’s Public Debt (2000-to date )

For a variety of reasons, ranging from a desire to accelerate capital spending to economic stabilization policy, governments may choose to raise some of their resources by borrowing rather than taxation. However, Nigerian public debt has been a major strain in the growth and development of the economy. 

Efforts to clear the nation of some part of a sizable chunk of its external debt between 2005 and 2007 yielded some fruits. This brought the total reduction in the outstanding external debts of the country from N₦,890 billion to ₦431 Billion. 

Thereafter, successive governments accumulated more debts which have made it to remain indebted to the international financial institutions to the tune of  ₦9,987 billion as of the first quarter of 2020.

The debt profile shown above is due to various factors including budget deficits, huge recurrent expenditure and high cost of governance. Also increasing inflation rate, and dwindling government revenue arising from the fall in oil prices, a major revenue earner of the country. 

External and domestic borrowing is meant to enhance infrastructural development that will attract foreign investors. But the effect of borrowing has not really been felt in Nigeria. The country has continued to record a high rate of insecurity and militancy due to the high rate of unemployment among the active labour force, high rate of poverty, lack of infrastructure, high rate of inflation, and low ease of doing business ranking. In terms of the ease of doing business, Nigeria ranks 169 out of 190 countries with easy access to electricity for doing business. Furthermore, it ranks 179 and 148 in the ease of trading across borders and resolving insolvency respectively.

To this effect, there is growing concern about the borrowing rate in Nigeria, especially the non-commensurate development outcomes.

Expert Opinion on Debt Management Strategies 

According to the Chairman, House Committee on Commerce, Hon. Olufemi Fakeye, one way to checkmate the developmental effect of loans on the economy is to develop a defined method of disclosing and confirming how the loan is acquired and how it is spent on various projects. Hon. Fakeye made this known as a panelist at a webinar organized by the Nigerian Economic Society on the 20th of July 2020. 

The webinar was tagged “COVID-19 and Beyond: Debt and Macroeconomic management. Further to his suggestion, Hon. Olufemi disclosed that he has already sent a bill regarding the subject matter to the House of Representatives for gazetting. 

The bill which he titled “Capital expenditure adaptability and disclosure bill” aims to compel the Executive, through the Finance Minister to disclose the sources and funds available to Nigerians every 6 months.

The Director-General of the Debt Management Office (DMO) Abuja, Ms. Patience Oniha who was also a panelist at the webinar noted that the best way to manage debt was not by avoiding borrowing entirely. She noted that emphasis should be laid on infrastructural expenditure that would attract investors to develop the manufacturing and production industries. 

Professor Mike Obadan, a member of the CBN’s monetary policy committee corroborated the DG of DMO by noting that debt is an important component of macroeconomics. He also suggested that instead of taking short term loans, the focus should be on long term loans that will finance the development of infrastructures over a long period of time. 

Cutting the size of government will also go a long way to manage debt. This call has been made several, beginning from the Steve Orasanye report. The report recommends the collapse of a few agencies to become a bit more efficient and make the government much more efficient with whatever it has. 

The Vice President, Yemi Osibanjo also recently corroborated the recommendations of the Orasanye report when he noted that Nigeria runs a large and expensive government where 70% of the revenue supposed to be used for development are used for service overhead costs. 

Thus, there is a need to review the size and cost of governance in Nigeria. This will help to reduce government budget expenditure which is largely overhead cost. It will also reduce the budget deficit thereby also reducing the amount to be borrowed.