Is there an end in sight to Nigeria’s growing debt?

by MMC
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Nigeria’s Debt Management Office (DMO) recently revealed a worrying development: the country’s total public debt jumped to N87.38 trillion at the end of the second quarter (Q2) of 2023. The figure marks an increase staggering 75.29 percent, equivalent to an additional N37.53 trillion, compared to the N49.85 trillion reported three months earlier, in March 2023. This debt notably includes the N22.71 trillion provided by the Central Bank of Nigeria under ways and means progress.

As of June 30, 2023, Nigeria’s total public debt stood at N87.38 trillion ($113.42 billion). This encompassed the internal and external debt of the Federal Government of Nigeria, the thirty-six states and the Federal Capital Territory.

Initially, the DMO predicted that the country’s public debt could reach N77 trillion, especially after the National Assembly approved former President Muhammadu Buhari’s request to restructure the Central Bank of Nigeria. However, the latest data paints a more alarming picture, with the debt surpassing the DMO estimate of N10.38 trillion.

38.05 percent of Nigeria’s debt constitutes external debt, which poses a formidable challenge due to its dependence on foreign currencies. Exchange rate fluctuations, such as currency depreciation, can lead to increased interest payments and negative budgetary consequences. In addition, the possibility of an increase in interest rates makes the situation more complex.

One of the main channels through which the Nigerian government finances its budget is the central bank’s ways and means mechanism. This facility serves as a financial lifeline to the government when it faces a budget deficit. However, the risk associated with this approach is the double-digit inflation currently plaguing the country, posing a serious threat to a fragile economy. Borrowing at this rate from the central bank, in a country where inflation has continued to rise since 2019, could deal a fatal blow.

The DMO projects that Nigeria’s total public debt can reach 37.1 percent of its gross domestic product (GDP) this year, closing in on the government’s self-imposed limit of 40 percent. Furthermore, the debt office projects that Nigeria’s debt service to GDP ratio will reach 73.5 percent in 2023, surpassing the government’s limit of 50 percent, mainly due to a generation of insufficient income.

Nigeria finds itself at a critical juncture where servicing its debt could soon pose a major economic challenge. Currently, the country has the fourth lowest revenue-to-GDP ratio worldwide. To alleviate Nigeria’s growing debt burden, the government must address its dwindling revenues. The heavy reliance on oil revenues implies that as uncertainties in the global oil market and internal problems such as oil theft persist, revenues will continue to decline.

At the same time, government spending is growing faster than expected, leading to increased borrowing to cover deficits. This growing debt burden means that a higher proportion of revenues will be allocated to servicing the debt. To address this precarious situation, the government must take decisive steps to reduce the high cost of governance, eliminate frivolous spending and fight corruption. This administration must balance the need to borrow with fiscal responsibility. The road ahead requires prudent financial management and diversification of revenue sources to ensure a stable and sustainable economic future.

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