Nigeria’s total public debt hit N39.56 trillion by the end of the 2021 fiscal year.
The total public debt has increased from N7.56 trillion in December 2012 to N39.56 trillion in December 2021, growing by 423.28%.
The debt profile of the country has been increasing over the years. It increased by 195.25% between December 2012 and March 2015 and 228.03% from March 2015 to December 2021.
While the rate of increases have generated conversations, there are also concerns on how the country will repay these loans. The question is, when is public debt too much and considered unsafe?
Unsafe public debt refers to a situation where under existing and likely future policies, the ratio of debt to GDP will increase steadily, making repayment impossible at some point.
Three variables are considered in analysing the safety or otherwise of public debt. These variables are the budget balances, the real interest rate, and the economic growth rate.
The budget balance, difference between revenue and net expenditure (total expenditure less interest repayment) of Nigeria has been negative over the last decade.
In simple terms, a negative budget balance means the country’s net spending is more than its revenue.
The second variable to consider is the real interest rate. The higher the rate, the more the repayment amount as it increases over the years. The lending organisation has control of interest rates. Data analysis from a recent report shows that Nigeria spent more on interest repayment on loans than the initial principal. Yet again, this variable does not favour Nigeria’s continued borrowing.
Economic growth in Nigeria has been up and down. The country has had periods of In the last year, however, the economy picked up from its fall in 2020 to end the year above the growth recorded in 2019. Issues like inflation, unemployment, devalued currency, trade deficit, and the intractable insecurity in the country, the economy is in a precarious position in a real sense. Rising price of crude and the burden of subsidy are even more present detractors to the growth of the economy.
A review of the three variables shows that the country’s performance on two of the variables, budget balance, and real interest rate, is negative while the third, which is the economic growth rate, is shaky.
A two-step approach is adopted to ascertain the level of debt unsafety. The first is to come up with forecasted estimates of the three variables. After that, this forecast is measured against the debt-to-GDP ratio. While the projections of these estimates are available, the limitation is the degree of uncertainty associated with these forecasts.
The second step depends on the nature of government and overall, the outcome depends not only on the present government but also on the future government.
While one cannot declare Nigeria’s debt burden as completely unsafe, it is clear that it should not continue to rise at the rate at which it is rising without a positive counterbalance on the three variables that is consistent.
Policies to increase the country’s revenue generation and diversify its revenue streams are critical now as this will ease the pressure on oil revenue and enhance the country’s overall development.