Nigeria is in the grip of debt hysteria. The major factor militating against the growth and development in Nigeria is the huge external debt with the implied servicing requirements.
Accumulated debt reduced economic performance through overhang effects and macroeconomic instability in the form of discouraging saving, increase fiscal deficit, exchange rate depreciations and Balance of payment disequilibrium amongst others. Also, large external debt had exerted a significance influence on Nigeria’s level of international reserves.
Profile of Nigeria’s Debt
Nigeria will use nearly a quarter of its 2020 budget to repay debts the government owes locally and internationally.
President Muhammadu Buhari while proposing a spending plan of N10.3 trillion to the National Assembly, making next year’s proposed budget the country’s highest ever. Of that amount, Mr Buhari said his government will spend N2.5 trillion to service debts.
“Debt service is estimated at N2.45 trillion, and provision for Sinking Fund to retire maturing bonds issued to local contractors is N296 billion,” President Buhari said.
Nigeria’s debt profile rises to $81.27 billion in the first quarter of 2019. In its Q1 public data report released, the Debt Management Office said the figure represents N560 billion increase in the total public debt from $79.437 billion recorded in December 2018.
According to the Debt Management Office, domestic debt recorded N458.363 billion increase across federal, states and federal capital territory while external debt increased by N101.6 billion during the same period.
Nigeria started to experience external debt problems from the early 1980s, as a result of fall in the prices of oil in international market that caused a reduction in foreign exchange earnings of the country.
The increase in the volume of Nigeria’s debt is a reflection of increase in the loans from the International Capital Market (ICM) and multilateral institutions, bilateral sources, the accumulation of trade arrears, default charges on over-due scheduled payments, capitalization of unpaid interest and the depreciation of the dollar.
Most of the loans taken by Nigeria, particularly in the pre-structural adjustment period, were sourced to finance development projects. It was during the period of the Structural Adjustment Programme (SAP) that borrowing for balance of payments support became very popular. But before now, borrowed funds were used to procure import needed for development projects.
The country’s borrowings from the World Bank are mainly for agriculture, water supply, road network, education, port development, small and medium-scale industrial projects, urban development, and aspects of infrastructural development (Debt Management Office).
Nigeria’s resort to the international capital markets for loans was the beginning of reckless borrowing by the successive governments. This caused a very deep deterioration in the internal debt profile and generated payments crisis, thus creating the need for rescheduling and refinancing. Looking at the introduction of structural Adjustment Programme (SAP) in restructuring the economy of Nigeria, as a form of compliance to the dictate of International Monetary Fund, World Bank, Paris Club, and other International Finance Institutions.
The huge foreign debt burden that hung on the neck of Nigeria created a lot of problem for the country. The huge debt accumulation lead to debt servicing problems, which stashed away resources dearly needed for development in Nigeria owing to the high debt service payment obligation; that got worse because of default in the interest payments, and the capitalization of the accumulated interest into the initial debt stock.
The increased the volume of the external debt stock which made it appeared unsustainable. Whereas the debt relief payments returned the external debt to a sustainable level.
The creditor nations used debt as an imperialist and neo-colonial instrument, to maintain the dependent nature of the poor debtor nations.
The debt relief granted Nigeria, was designed to make sure we remained in debt within a medium term range. As well, rescheduling arrangements often structured in way that the debt will still have to be paid back in future with the interest charges.
This underlined the attitude of the creditors in Nigeria’s debt problem. It is important that Nigeria, through its Debt Management Office, rearrange and prioritize debt management strategies effective in reducing the Nigeria’s foreign debt stock.
In terms of rescheduling option, Nigeria should always look for multi-year rather than year by year rescheduling.
Also, The Debt Management Office should ensure the purpose, duration commitment, economic viability of projects, match between loan terms and project profiles and so on before contracting such loan, and to ensure proper utilization of the loan.