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Nigeria’s Debt is Sustainable, But Dangers Loom on the Horizon

09 Sep 2021
By Professor Stephen Onyeiwu
Nigerian naira bills. Source: Maksym Kapliuk/Shutterstock

To non-economists, the World Bank ranking Nigeria fifth on the list of its top ten debtor countries is alarming. A deeper analysis shows there is no cause for concern.

The World Bank recently ranked Nigeria fifth on the list of 10 countries to which it has the highest debt exposure. Nigeria owes the International Development Association – one of the two lending arms of the World Bank – US$11.7 billion. The International Development Association lends to countries based on their relative poverty or per capita income levels, at low to zero interest rates. Nigeria qualifies for funding based on its per capita income levels.

To non-economists, the announcement that Nigeria is fifth on the list of International Development Association borrowers is alarming. It appears to portend grave dangers for the Nigerian economy and the welfare of Nigerians. A more nuanced analysis of Nigeria’s debt profile, however, shows that the World Bank’s report does not give as much cause for concern.

As of 31 March 2021, Nigeria’s external debt stock was about US$32.9 billion. Of this amount, debt to multilateral institutions such as the World Bank accounted for 54.3 percent, followed by commercial debt (33 percent), bilateral debt (12.7 percent) and promissory notes (0.55 percent). Domestic debt stock was about ₦16.5 trillion or US$40 billion, using the Central Bank of Nigeria’s 30 August 2021 official exchange rate of ₦410 to $1. Nigeria’s total public debt was about $87 billion. Domestic debt represented 62.3 percent of this at 31 March 2021, and external debt 37.6 percent.

How much debt is too much?

Debt risk is not only about how much a country has borrowed, but also the country’s ability to service its debt. Economists use two indicators to determine a country’s debt sustainability. The first is gross debt as a percentage of a country’s economy as measured by the gross domestic product (GDP). This is commonly referred to as the debt-to-GDP ratio. Nigeria’s external debt-to-GDP ratio was 12.7 percent in 2019. The International Monetary Fund puts total debt-to-GDP at 34.3 percent. Economists believe that debt begins to hurt economic growth when the total debt-GDP ratio exceeds 90 percent. Based on this threshold, Nigeria’s current debt level is harmless.

Most of the top ten countries to which the International Development Association has significant exposures have much higher debt-GDP ratios than Nigeria. For instance, the external debt-GDP ratios for some of the top ten countries on the World Bank’s list are Ethiopia (29.7 percent), Ghana (41.1 percent), Kenya (36.6 percent), Tanzania (31.8 percent) and Uganda (40.8 percent).

Another indicator of debt sustainability is the debt service ratio, which is the proportion of export earnings that is used to service a debt, including principal and interest payments. A healthy ratio is below 15 percent. Nigeria’s debt service ratio fell from 23 percent in 1990, to an all-time low of seven percent in 2019, lower than some major African countries: Angola (27 percent), Ethiopia (29 percent), Kenya (38 percent), South Africa (16 percent), and Tanzania (14.7 percent).

Based on the debt-GDP and debt service ratios, Nigeria’s debt is sustainable. Why then should anyone worry about Nigeria’s name appearing on the list of top ten countries the World Bank has lent the most money? One reason may be concerns about Nigeria’s ability to meet its debt obligations in the future.

Debt repayments are often made from revenue generation. At less than five percent, Nigeria has one of the lowest revenue-GDP ratios in Africa. The average for sub-Saharan African countries is almost 20 percent, and 30 percent for oil exporters.

About 65 percent of government revenue and over 90 percent of foreign exchange earnings in Nigeria comes from the oil sector. Uncertainties in the global oil market and sluggish revenue growth, as well as the negative impacts of COVID-19 on the economy, imply that the country would face challenges generating enough revenue to service its debt. By October last year, only 64 percent of the revenue expected from oil had been generated. Meanwhile, government expenditures have been growing faster than expected, meaning that the deficits will be covered by borrowings. More borrowings means that an increasing proportion of revenues generated will be devoted to debt service.

Another source of worry about Nigeria may be related to the continuous deterioration in the country’s macroeconomic performance during the past five years. Creditors are often concerned about debtor countries whose economies are not well managed, and perceive them as risky borrowers. Nigeria’s economic growth fell from 11.9 percent in 2015 to 2.2 percent in 2019, and then turned to negative 1.8 percent in 2020 because of COVID-19.

The rate of inflation rose from nine percent to 13 percent during the same period, while the unemployment rate jumped from nine percent in 2015 to 22.6 percent in 2018. The naira has depreciated by a whopping 57 percent between 2015 and 2019. These are all macroeconomic challenges.

Media frenzy generated by the recent World Bank ranking may rattle foreign investors and further reduce Nigeria’s attractiveness as an investment destination. Foreign direct investment in the country has been declining continuously, from six percent of GDP in the mid-1990s to about 0.5 percent in 2019. There is also the risk that foreign investors in Nigeria may relocate to other less risky countries, thereby depriving the country of revenues needed to service debt. This is more so as the country battles other challenges such as high unemployment, interest, and inflation rates, insecurity, poor infrastructure, and acute shortages of foreign exchange.

To change its perception as a debt-risk country, Nigeria needs to manage its debt very prudently and avoid a return to the era of the early 2000s when the country’s debt-GDP ratio was almost 60 percent. It should reduce the high governance cost and rein in corruption. Nigeria’s government should promote faster economic growth by investing in infrastructure (especially roads and electricity), providing access to capital for micro, small, and medium-sized enterprises, and supporting agricultural development.

There is also an urgent need to diversify the economy and make it less reliant on oil. The Nigerian government should embark on an intensive public enlightenment campaign about the sustainability of Nigeria’s debt. There has been a public perception, albeit erroneous, that Nigeria is under debt distress. Although Nigeria’s Debt Management Office has tried to counter that narrative, more should be done by the government.

Stephen Onyeiwu is the Andrew Wells Robertson Professor of Economics at Allegheny College in Pennsylvania, USA.

This article was originally published in The Conversation on 9 September 2021.