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National Debt as a necessity of the moment

By Tunde Afolabi

The national debt in simple form is the amount of money that a national government has borrowed through various means, including foreign governments, investors and federal agencies.

Debt

The recent release of Nigeria’s total debt exposure as at 2018 by the Debt management office (DMO) which stood at N22.4 Trillion naira, has been received with wide spread condemnation across the media space. Many could not understand the sudden leap in our debt profile from 11.2trillion in 2014 to 22.4 Trillion naira in 2018.

A large number of citizens attributes this high numerical value to gross inefficiency on the path of the present government. This line of thought is, in my view, quite parochial, hence the need for a subtle review of our debt profile.

The concept of national debt is a necessity that is much desired for any nation that craves for a sound fiscal growth. National debt is majorly for the financing of deficit spending. Deficit spending is when purchases exceed income. This often happen to businesses and individuals but is most used in government. When government spending exceeds revenue, a budget deficit occurs. This deficit is majorly financed by debts.

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Advanced economies have experienced ballooned debt profile during recession, depression and war periods. Debt financing has rescued many nations from recession. President Franklin D. Roosevelt the 32nd  United states of America President in 1932    increased budget deficit by $3bn USD to fight the Great Depression and restored public confidence. He spent around $50bn USD a year to fight world war two.

President George Bush increased deficit financing    more than the great depression because of the 9/11 attacks . The war on terror at that moment drove military spending to unimaginable new heights. By 2008 total cost grew to $186bn, excluding annual budgets for the departments of defense. This deficit spending was majorly financed by debts.

Deficit spending under President Obama ballooned. In 2009 he proposed a $787bn USD economic stimulus package to end the 2008 financial crisis. The package gave extended economic relief packages in form of unemployment benefits and public works project. Companies that collapsed under the financial crisis were given relief funding and many of them which include GM motors were rescued and doing so well now. All this deficit spending increased the US debt profile to an all-time high of $21trillion dollars as at date.

The Origin of Nigeria’s debt as a nation dates back to 1958 when a loan of $28 Million USD was contracted from the world bank for the purpose of constructing railway and other developmental projects( Ndekwe, 2008)

In 2015, the government of President Buhari inherited a country in an extremely bad shape. Federal income suddenly experienced a major slump due to the fall in global crude oil price to $30.26 USD in 2016. There was a huge infrastructural deficit in the country, depleted foreign reserve and low national savings during the previous year’s oil boom. Many states were at the brink of bankruptcy and an imminent recession loomed. This situation was dire coupled with the war ongoing in the North East. To survive such moments, the country amidst poor revenue and huge public expenditure demands, deficit debt financing became inevitable.

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Our current N22.4 Trillion naira debt profile may be huge in numbers but it is still within the acceptable framework using the Debt to GDP ratio analysis. The debt-to-GDP ratio compares a country’s sovereign debt to its economic outputs for the year. The output is measured in form of the Gross Domestic Product (GDP). A high ratio means a country is not producing enough to pay its debts while a low ratio means a country is producing enough to meet its debt demands.

A study by the World Bank shows that a persistent Debt to GDP ratio of 77% is not desirable for economic growth. A recent data of Nigeria debt-to-GDP ratio shows a conservative figure of 24% far better than many advanced economies. According to Wikipedia the United states America has a Debt to GDP ratio of 104% , followed by Germany the biggest economy in Europe with debt to GDP ratio of 74% and Japan 228%.

“Crowding out” theorist have argued that a persistent government borrowing have the tendency to hinder private sector investment since most private sector financing outfits will rationally take advantage of the secured government borrowing that comes in form of bonds and treasury bills . A controversial paper titled “Growth in a time of debt” 2010 by Carmen Reinhart, and Kenneth Rogoff, argued that GDP growth has been noticed to be hindered when debt–to-GDP ratio exceed 90%. This further corroborates previous World Bank studies.

It is important to note that when national debt is below the tipping point, lt improves lives. Government spending boost economic development and when infrastructure are been built, it fast track economic development.    The massive injection of funds into the railway sector, small and Medium scale businesses relief packages and investment in the power sector can only lead to economic development which gives opportunities to citizens and more taxes for the government .  Nigeria’s current debt profile is a perfect example of national debt becoming national necessity.

Babatunde Afolabi writes from Lagos


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Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.