Cash-strapped, and faced with limited options, the Federal government (FG) will once more rely on borrowing to fund the 2021 budget deficit.
- Government’s continued borrowing could lead to a debt spiral;
- Nigeria’s projected GDP growth of 3% while ambitious, seems unlikely;
- Nigeria to pay an average of $303,683 monthly in 2021 for matured loans.
Losing before we even started… Once again, Nigeria finds herself in a conundrum. The 2021 budget seeks to borrow ₦4.28tr, which could push Nigeria’s debt servicing to over ₦13.5 trillion.
Even scarier, Nigeria’s debt in four years could be ₦35 trillion. In June 2015, Nigeria’s total debt profile was ₦12.1 trillion. And per the Debt Management Office (DMO), this figure increased to ₦31 trillion by June 30, 2020. Now add the ₦4.28tr, and you get ₦35 trillion.
Over the years in servicing accumulated debts, Nigeria has spent ₦943bn in 2015, ₦1.36trn in 2016 and ₦1.66trn in 2017.
Similarly, in 2018, the Federal Government (FG) spent ₦2.23trn on debt servicing while in 2019, it spent ₦2.14trn.
Also important are the implications to the Economic Sustainability Plan (ESP). Because servicing the nation’s debt with ₦13.5 trillion alongside a ₦4.28 trillion future debt commitment raises questions on FG’s aspiration to build infrastructures and a competitive economy.
And this is already clear, as the government plan capital expenditure allocation for 2021 was crowded out by other expenses, including debt repayment.
To understand this burden, Dataphyte analysed data from the World Bank Debtor Reporting System on Nigeria’s matured loan repayment obligation schedule for 2021.
The data shows Nigeria must pay $3,610,082,000; that is an average of $303,683,000 monthly in 12 months.
From the sum, FG will make $1,004,073,000 payment to African Development Bank, Asian Dev. Bank, Inter-American Dev. Bank, International Monetary Fund, World Bank-IBRD, World Bank-IDA, and others in its multilateral agreement.
Again, bondholders are to receive $2,165,814,000, while China, France, Germany, India and Japan will get the sum of $474,015,000.
For countries breakdown, as expected, China will receive the highest amount, $398,814,000. Following are France with $67,000,000; India with $5,013,000; Germany with $3,188,000 and Japan, $300,000.
And sustainability… how does FG plan to manage this
While the government claims it has no choice but to continue the trend on borrowing, the latest plan for 2021 is set to further push Nigeria’s debt-to-GDP which stands at 18.2% (June 2020) the highest in the country’s history, again closer to the global benchmark for debt-to-GDP ratio of 40% for developing countries.
To say nothing of the plan’s sustainability. How does FG plan to manage this?
For context, in the first quarter of 2020, Nigeria incurred ₦943.12 billion in debt service, keeping a revenue of ₦950.56 billion. By implication, Nigeria failed to even break even with a 99% rate of debt service to revenue.
Likewise, a look at the projected 3% GDP growth seems ambitious; the last time Nigeria had a GDP growth at 3% and above was in 2014, which was 6.22%. Since then, Nigeria has failed to reach or cross the 3% threshold. As a Nigerian, one can only hope this 3% growth plan is actualised.
Budget 2021: Will time justify debt?
The House of Representatives approved the bill with Dr Zainab Ahmed defending the plan, noting “time will justify the borrowings in the last 4 to 5 years”.
What Next?
in Nigeria’s quest to offset debt, she would have to borrow even more.
While presenting the budget estimates for MDAs, Dr Zainab Ahmed explained that each consideration was in line with the government’s policy thrust, as articulated in Nigeria’s Economic Sustainability Plan (ESP).
The problem, however, with borrowing is piling interest rates. Tejvan Pettinger posited a long held agreed economist theory, which states that rising debt as a share of the economy would drive up the amount of money governments must pay in interest to borrowers. Hence, in Nigeria’s quest to offset debt, she would have to borrow even more.
Pettinger further listed the problems of government borrowing as higher debt interest payments, a need to raise taxes, and, sometimes, inflationary pressures (printing more money).
What does all this mean? In essence, Nigeria’s loan creditors, like the World Bank and the Exim Bank of China, could demand higher interest rates to hand more cash to an indebted borrower. So Nigeria’s debt payments could become more expensive.
From all indications, Nigeria could head into a debt spiral; except the global oil market, from which a sizable chunk of Nigeria’s revenue is relied on, appreciated. But for this miracle, Nigeria will continue to fund its debt against the critical socio-economic needs of the population.