According to the 2023-2035 Medium Term Expenditure Framework & Fiscal Strategy Paper, the Federal Government estimates that debt servicing will cost N10.43 trillion by 2025.
This represents a 182.66% increase over the N3.69tn budgeted for debt service in 2022.
Multilateral agencies and economists have repeatedly warned the Federal Government about the rising cost of debt service, which could lead to a national crisis.
However, Dr. Zainab Ahmed, Minister of Finance, Budget, and National Planning, and Patience Oniha, Director General of the Debt Management Office, have insisted that the country does not have a debt problem, but rather a revenue challenge.
In a document obtained by our correspondent recently from the DMO DG, the DMO stated that high debt levels would frequently result in high debt services, affecting infrastructure investments.
“High debt levels lead to heavy debt service,” according to the DMO DG, “which reduces resources available for investment in infrastructure and key sectors of the economy.”
She emphasized the importance of debt sustainability in the document, which she defined as the ability to service all current and future obligations while maintaining the capacity to finance policy objectives without resorting to unduly large adjustments or exceptional financing such as arrears accumulation or debt restructuring, which could otherwise jeopardize the economy’s stability.
The finance minister admitted that Nigeria was struggling to service its debt at the recent launch of the World Bank’s Nigeria Development Update, titled “The Urgency for Business Unusual,” held in Abuja.
“Already, we are struggling to service debt because, while revenue is increasing, expenditure is increasing at a much faster rate, so it is a very difficult situation,” she said.
The International Monetary Fund previously warned that if adequate measures to improve revenue generation are not implemented, debt servicing could consume 100% of the Federal Government’s revenue by 2026.
According to the IMF’s Resident Representative for Nigeria, Ari Aisen, interest payments on debts could wipe out the country’s entire earnings in the next four years, based on a macro-fiscal stress test conducted on Nigeria.
“The most critical aspect for Nigeria is that we have done a macro-fiscal stress test, and what you observe is the interest payments as a share of revenue, and as you see us in terms of the baseline from the federal government of Nigeria, the revenue is projected to be taken by debt service by 2026,” Aisen said.
“So, the fiscal space or the amount of revenues that will be needed and this, without considering any shock, is that most of the Federal Government’s revenues are actually now, in fact, 89% and it will continue to be taken by debt service if nothing is done,”
The finance minister revealed that Nigeria’s debt service costs exceeded its revenue in the first four months of this year less than two months after Aisen’s warning.
Between January and April 2022, debt service consumed N1.94 trillion, while retained revenue totaled N1.63 trillion.
A recent PUNCH report states that between January and November 2021, the Federal Government spent N1.15 trillion more on debt service than was budgeted.
According to a copy of the finance minister’s public presentation of the 2022 budget’s approval, the federal government set aside N3.32 trillion for debt servicing in 2021.
However, according to the minister’s presentation document, N4.2 trillion or 37.9% of the funds allotted for debt servicing for the time period were spent on debt servicing in just 11 months, which represents a difference of N1.15 trillion.
According to a report by the Nigerian Economic Summit Group and the Open Society Initiative for West Africa, based on a debt sustainability analysis, Nigeria and ten other Economic communities of West African States countries are currently in financial distress.
Benin, Burkina Faso, Cabo Verde, the Gambia, Ghana, Guinea Bissau, Liberia, Niger, Senegal, and Togo are the other ten countries.
The report also revealed that these countries’ public debt accumulation was becoming unsustainable and needed to be addressed in order to avoid a debt crisis.
The report warned that the possibility of a debt crisis in Nigeria would harm public and private investments, as well as other sectors of the economy.
The World Bank recently stated that Nigeria’s debt, while currently considered sustainable, was vulnerable and costly.
According to the Washington-based global financial institution, the country’s debt was also at risk of becoming unsustainable in the event of macro-fiscal shocks.
Experts have criticized the Federal Government’s proclivity for debt, calling it unsustainable.
Economists criticize FG’s proclivity for debt
Dr Muda Yusuf, Chief Executive Officer of the Centre for the Promotion of Private Enterprise, stated that the Nigerian economy has been marked by a variety of economic vulnerabilities, including rising public debt and debt service burden.
“The debt service to revenue ratio for the first four months of the current year is more than 100%,” he said. The implication is that the government’s actual revenue over the period is insufficient to service debt. As a result, additional borrowing will be required to fund government operations such as personnel costs, overhead costs, capital expenditures, and even some debt servicing. These point to serious vulnerabilities in the Nigerian economy.”
Prof Olufemi Saibu, a Professor of Development Macroeconomics at the University of Lagos, has criticized the government for excessive borrowing.
“I think we’re overborrowing,” he said. We continue to rely on international benchmarks, which causes us to be sluggish when it comes to revenue generation.”
Prof Saibu urged the government to reduce its massive expenditures and redirect funds to more productive sectors of the economy.
“With our current heavy infrastructure debt financing and the local economy’s low productivity, the government must find a way to reduce its expenditures.” “We need to redirect the government’s finances to more productive areas while borrowing less for consumption,” he said.
Furthermore, Prof Saibu stated that the government should look inward and borrow domestically rather than externally to reduce the burden of debt service.
He suggested that the government stop claiming that the country has the ability to borrow more and stop ballooning already massive debts.
Prof Saibu suggested that the government involve the private sector in infrastructure development to reduce the burden on the public sector.
Prof Adegbemi Onakoya, Professor of Development Economics at Babcock University, stated that borrowing was not the issue, but rather the value obtained from it.
He also stated that Nigeria was experiencing a revenue shortfall, which had forced the country to rely more heavily on debt financing.
Prof Onakoya also stated that there was a problem when borrowed money was not used wisely for productive purposes or programs that would aid production.