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The World Bank recently ranked Nigeria fifth on the list of the 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 – $ 11.7 billion.
The International Development Association lends to countries based on their relative poverty or per capita income level, at low to zero interest rates. Nigeria is eligible for funding based on its level of per capita income.
For non-economists, the news that Nigeria is fifth on the International Development Association’s borrower list is alarming. This seems to portend serious dangers to the Nigerian economy and the well-being of Nigerians.
A more nuanced analysis of Nigeria’s debt profile, however, shows that the World Bank report is not as worrying.
As of March 31, 2021, Nigeria’s external debt stock was approximately $ 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 %). The stock of domestic debt was approximately 16.5 trillion naira or 40 billion US dollars, using the official Central Bank of Nigeria exchange rate of August 30, 2021 of 410 naira to 1 dollar.
Nigeria’s total public debt was around $ 87 billion. Domestic debt represents 62.3% as of March 31, 2021, and external debt 37.6%.
How much debt is too much?
Debt risk is not only about the amount borrowed by a country, 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 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 estimates total debt to GDP at 34.3%.
Economists believe that debt begins to hurt economic growth when the total debt-to-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-to-GDP ratios than Nigeria. For example, the external debt-to-GDP ratios of 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 used to service debt, including principal and interest payments. A healthy ratio is less than 15%.
Nigeria’s debt service ratio fell from 23% in 1990 to a historic low of 7% in 2019, lower than that of some large African countries: Angola (27%), Ethiopia (29%), Kenya (38 %) South Africa (16%) and Tanzania (14.7%).
Based on debt-to-GDP and debt service ratios, Nigeria’s debt is sustainable. Why then should anyone worry that Nigeria’s name is on the list of the 10 countries to which the World Bank has lent the most money? One of the reasons may be concerns about Nigeria’s ability to meet its debt obligations in the future.
Debt repayments are often made from income generation. With less than 5%, Nigeria has one of the lowest income-to-GDP ratios in Africa. The average for sub-Saharan African countries is nearly 20% and 30% for oil exporters.
About 65% of government revenue and over 90% of Nigeria’s foreign exchange earnings come from the oil sector. Uncertainties in the global oil market and sluggish income growth, as well as the negative impacts of COVID-19 on the economy, imply that the country would face challenges generating enough income to service its debt.
As of October last year, only 64% of expected oil revenues had been generated. Meanwhile, government spending has grown faster than expected, meaning deficits will be covered by borrowing. More borrowing means that an increasing proportion of the income generated will be spent on debt service.
Another source of concern for Nigeria may be linked to the continued deterioration in the country’s macroeconomic performance over the past five years. Creditors are often concerned about debtor countries whose economies are not well managed and perceive them as borrowers at risk. Nigeria’s economic growth fell from 11.9% in 2015 to 2.2% in 2019, then turned negative from 1.8% in 2020 due to COVID-19.
The inflation rate fell from 9% to 13% during the same period, while the unemployment rate fell from 9% in 2015 to 22.6% in 2018. The naira depreciated by 57% between 2015 and 2019. These are all macroeconomic factors. challenges.
The media frenzy generated by the recent World Bank ranking could rattle foreign investors and further reduce Nigeria’s attractiveness as an investment destination. Foreign direct investment in the country has steadily declined from 6% of GDP in the mid-1990s to around 0.5% in 2019.
There is also the risk that foreign investors in Nigeria will relocate to other less risky countries, thus depriving the country of the income needed to service the debt. This is all the more true as the country faces other challenges such as high unemployment, interest and inflation rates, insecurity, poor infrastructure and severe currency shortages.
To change its perception of a country at risk of debt, Nigeria must manage its debt very carefully and avoid a return to the era of the early 2000s when the country’s debt-to-GDP ratio was nearly 60%.
This should reduce the high cost of governance and curb corruption. The Nigerian government should promote faster economic growth by investing in infrastructure (especially roads and electricity), providing access to capital to micro, small and medium enterprises and supporting agricultural development.
There is also an urgent need to diversify the economy and make it less dependent on oil. The Nigerian government should embark on an intensive public awareness campaign on the sustainability of Nigerian debt. There has been a public perception, albeit mistaken, that Nigeria is in over-indebtedness. Although Nigeria’s Debt Management Office has tried to counter this narrative, the government should do more.
Stephen Onyeiwu does not work, advise, own shares, receive funds from any organization that could benefit from this article, and has not declared any affiliation other than his research organization.
By Stephen Onyeiwu, Andrew Wells Robertson Professor of Economics, Allegheny College
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