Every country in the world aims at achieving economic growth and development, however, this is only possible if a country has adequate resources. In developing countries, especially those in sub Sahara Africa, the resources to finance the optimal level of economic growth and development are in short supply. This is as a result of the economies plagued with problems of low domestic savings, low tax revenues, low productivity and meagre foreign exchange earnings.
Basically, for these reasons, many developing countries yearning for economic growth inevitably resort to external financing to bridge the gap between their savings and investments. In the process of obtaining finance from abroad, a country may consider several options: grants, foreign investment and loans (concessional and non-concessional) in that order.
However, an admixture of these capitals in-flow in varying proportion could be obtained depending on the socio-economic and political situation in a country. Nigeria like most developing countries borrowed from external sources mainly for investment purposes. The country’s external debt was sustainable up to mid 1970’s. From the late 1970’s because of poor macro-economic management and declining prices of crude oil, the country’s external debt began its upward movement. Thus from an external debt of US $ 557.74 million in 1975, Nigeria debt peaked at US $33.1 billion in 1990 before declining to US $27.1 billion in 1997 and rose to US $ 28.8 billion in 1998.
Nigeria is a typical example of an African state that suffers under the crushing weight of a debt overhang, which means that the country currently has a huge external debt that constitutes a significant proportion of the GDP. It must be further noted that from a figure of $17.37 billion in 1983, Nigeria’s external debt rose speedily to $18.904 billion in 1985; $33.730 billion in 1991 and $32.58 in 1995. The debt stock declined marginally to $28.733 in 1998, while the total debt of Nigeria in 2002 was put at $31.
According to Debt Management Office Abuja, the position of Nigeria’s external debt as at end of December 2009 was USD 3.947billion. Out of the amount, the federal government owes $2.093 billion while state governments owe $1.85 billion, one can see that Nigeria has two major categories of external creditors. Namely, they are official creditors and Private creditors. Her official creditors are: International Fund for Agricultural Development (IFAD), African Development Fund (ADF), European Development Fund (EDF), International Bank for Reconstruction and Development (IBRD), African Development Bank (ADB), Economic Community of West African States (ECOWAS) Fund, and European Investment Bank. These official lists of international funders are Nigeria’s multilateral creditors. In the bilateral league are the Paris Club Creditors and Non-Paris Club Creditors. Also, Nigeria is indebted to Private Creditors which consist of Promissory Note Holders and The London Club Group. Initially, Nigeria borrowed concessionally only from the World Bank, a multilateral institution.
Nigeria’s debt crisis could also be traced to the misdirection of economic policies pursued since the buoyancy of the oil market which resulted in an outright neglect of the non-oil sector of the economy especially agriculture. Owing to this neglect of other sectors in the economy, the oil sector provided over 92 per cent of the government national revenue, so fluctuations that occurred in the oil market in 1978 and 1980s distorted the projected revenue estimates of the federal government. Hence, the government had to borrow to fill the gaps created by the fluctuation and also meets the increasing expenditures. The debt situation was also intensified by large public deficit relatively free capital in-flows, inefficient control over private capital out flows and real over valuation of the exchange rate of naira to other world currencies.
For these reasons and others, debt problem has become one of the most pressing issues in the world’s political and economic relationship for a Less Developing Countries (LDC) like Nigeria. In essence, what matters most is not the amount of the foreign loans but the ways and manner the loans are used in developmental process. If these loans are used for current consumption, they will have minimal impact on future economic growth but if invested rationally in productive ventures, they will contribute positively to real growth and enhance the productive capacity of the economy.
The fact is that development depends purely on a sustained increase in real income, which can only be achieved or accumulated from economic growth. Economic growth however, emphasizes on the changes in economy’s productivity over time. Growth tends to occur when total production increases more rapidly than population. Thus, it is the country’s ability to maintain a strong defense or to pay for some other national project. As a matter of fact, economic growth is an ever increasing quantity of goods and services available to meet the economy’s need over time. As a result, therefore, the higher the ratio of debt servicing payments; the lower the level of economic growth. The primary burden of Nigeria’s public debt is indeed shifted to the future, thereby retarding economic growth. The rate of investment tends to be low and unemployment rate become high because of our huge public debt.
Furthermore, our reputation is tarnished and the developed nations are no longer confident in our economy. This rise to reduction in the flow of foreign investment to Nigeria; which could have profound consequences for the economic development prospect of the nation. With the oil glut and reduced revenue, it is expected that our external debt liabilities will increase and our economy will be unstable. The debt crisis if not well managed will lead to liquidity crisis and foreign exchange challenges; which will retard the rate of economic growth and development in Nigeria.
The causes of Nigeria’s external debt burden over the years could be grouped into six areas and these are: Inefficient trade and exchange rate policies, adverse exchange rate movements, adverse interest rate movements, poor lending and inefficient loan utilization, poor debt management practices as well as accumulation of arrears and penalties.
In a related vein, reckless and inefficient borrowing was as a result of, massive external borrowing took place in the 1980s, largely to offset the collapse in oil prices; crucially, borrowing was not linked to future growth or exports, insufficient regard given to economic viability of projects, poor implementation due to weak absorptive capacity and governance problems, mismatch between loan terms and project profiles, interest rate risk as LIBOR rates escalated as well as leakages associated with governance problems.
The Debt Management Office, DMO, has disclosed that the country’s external debt which stood at $9.46bn as of March 31, 2015, has increased to $10.32bn (N2.03tn) at the end of June. The report by implication shows that the external debt profile has increased by $860m (9.09%) within the period of three months since Buhari took over. According the DMO’s report, Nigeria’s total debt stock now stands at N12.12tn ($63.81bn). When compared a year ago as at June 30, 2014, the country’s total debt stock stood at N10.43tn, which implies that within a 12-month period, the country’s debt stock had increased by 16.2%, adding N1.69tn.
Statistics obtained showed that the domestic debt stock of the Federal Government as of June 30, 2015 stood at N8.39tn or $42.63bn, against last year figure which stood at N7.42tn. By implication, within one year period, the domestic debt of the Federal Government rose by N970bn or 13.07%. The country’s domestic debts of the 36 States of the federation and the Federal Capital Territory Administration, stood at N1.69tn ($10.86bn) at the end of June 2015. The report disclosed that Federal Government Bonds accounted for N5, 300,418,821,000 or 63.13% of its domestic debt. The Nigerian Treasury Bills accounted for N2, 824,952,245,000 or 33.64% of the Federal Government’s total domestic bill, while Treasury bonds accounted for N271, 220,500,000 or 3.23% of the Federal Government’s domestic bill. In the external sector, multilateral donors accounted for 70.11% of the country’s external debt, while bilateral sources accounted for 15.35%. Commercial debts accounted for 14.54% of the nation’s external debt. In line with the nation’s dwindling resources as a result of falling oil prices, there are indications that borrowing will continue to play a major role in the funding of both the Federal and State Governments.
During his recent visit to the United States, President Muhammadu Buhari sealed deal providing $2.1bn funding from the World Bank for the rebuilding of the N/east devastated by Boko Haram insurgents. As the DMO continues to borrow for the government on monthly basis through the instrument of the FGN Bonds, experts have advised the government not to borrow to pay salaries or any other recurrent expenses. Meanwhile the Federal Government had earlier disclosed that it was planning to borrow between N180bn and N240bn through the sale of government bonds in the third quarter, the Debt Management Office has said. According to the DMO, the amount will be borrowed through the issuance of five and 20-year bonds. It had raised N210.22bn ($1.1bn) through government bond sales in the second quarter. It is also planning to sell the 15.54% 2020 bond at auctions in July, August and September with N35bn to N45bn on offer each month. It said it would also offer the 12.1493% 2034 bond in July, August and September with N25 to N35bn on offer each month.
President Muhammadu Buhari recently in Abuja expressed concern over the enormous debt profile of Nigeria’s aviation sector, saying that his administration will act quickly to redress the situation. ‘‘I am concerned about the enormous debt profile in the aviation sector. The Federal Government has to do something quickly because safety, security and international respectability are involved here. “Our airports are the windows through which people see our country. Anybody coming into the country will likely come through the airports. “If we cannot secure and maintain our infrastructure, it will reflect very badly on us,’’ President Buhari said after receiving a briefing from the Federal Ministry of Aviation. The President directed the Ministry of Aviation to speed up all processes and projects relating to the safety and security of Nigeria’s air transport system.
President Buhari further directed that counterpart funding for the upgrading of the international airports in Lagos, Abuja, Kano, Port Harcourt and Enugu, should be captured in the 2016 budget. The Permanent Secretary of the Ministry, Mrs. Binta Bello told the President that the five new International Airport Terminal Buildings were designed to meet the best international standards. The five international terminals, she said, could cater for 62 million passengers annually when completed in the first quarter of 2016, with Lagos moving from 7 million passengers’ capacity to 25 million, Abuja moving from 5 million to 16 million, while Kano, Port Harcourt and Enugu, will have the capacity for 7 million passengers each.
The reasons for increasing public debt on the part of the Nigerian government are attributable to the following reasons: (1) Government borrowed to finance emergencies such as natural disasters and economic depression. (2) Government borrowed to finance important capital projects such as water dams, agricultural development projects, road development projects. (3) Government borrowed to finance current expenditure in anticipation of reasonable revenue collection.
The present government is cautious and extremely careful about its spending; and its very reluctant about accumulating more debts, but with the reckless and frivolous spending of past government, lack of necessary savings and dwindling oil revenue, borrowing is inevitable, the exigent needs to pay salaries, categorical imperative of bridging diverse infrastructural gaps and need to embark upon germane development for nation building, servicing debts obligations, however, in all of this, one thing is very clear, under the present administration of President Muhammadu Buhari (PMB), funds will not be mismanaged and it will not be stolen by any public officer, that is why, the federal government has step up the war against corruption in the country as well as showing exemplary leadership by example, the federal government has also put a ceiling on the amount other tiers of government can borrow and for what purpose, while working conscientiously to drastically reduce the debt burden in the country.
It would also be recalled that when President Buhari assumed the mantle of leadership, he said openly that, he met an empty treasury and very high debt profile/burden, this practically and evidently explains it all
Written by Jide Ayobolu.
About the Author
