- Nigeria’s economy is struggling to recover from fluctuating oil price, inflation and impact of COVID-19 pandemic
By Stephen Onyeiwu, The Conversation, September 7, 2021
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%, followed by commercial debt (33%), bilateral debt (12.7%) and promissory notes (0.55%). Domestic debt stock was about N16.5 trillion or US$40 billion, using the Central Bank of Nigeria’s 30 August 2021 official exchange rate of N410 to $1.
Nigeria’s total public debt was about $87 billion. Domestic debt represented 62.3% of this at 31 March 2021, and external debt 37.6%.
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% in 2019. The International Monetary Fund puts total debt-to-GDP at 34.3%.
Economists believe that debt begins to hurt economic growth when the total debt-GDP ratio exceeds 90%. Based on this threshold, Nigeria’s current debt level is harmless.
Most of the top 10 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 10 countries on the World Bank’s list are Ethiopia (29.7%), Ghana (41.1%), Kenya (36.6%), Tanzania (31.8%) and Uganda (40.8%).
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%.
Nigeria’s debt service ratio fell from 23% in 1990, to an all-time low of 7% in 2019, lower than some major African countries: Angola (27%), Ethiopia (29%), Kenya (38%) South Africa (16%) and Tanzania (14.7%).
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 10 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 5%, Nigeria has one of the lowest revenue-GDP ratios in Africa. The average for sub-Saharan African countries is almost 20%, and 30% for oil exporters.
About 65% of government revenue and over 90% 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% 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% in 2015 to 2.2% in 2019, and then turned to negative 1.8% in 2020 because of COVID-19.
The rate of inflation rose from 9% to 13% during the same period, while the unemployment rate jumped from 9% in 2015 to 22.6% in 2018. The naira has depreciated by a whopping 57% 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 6% of GDP in the mid-1990s to about 0.5% 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%.
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 Andrew Wells Robertson Professor of Economics, Allegheny College
