By Aare Afe Babalola, SAN, OFR

According to recent statistics from the Debt Management Office, Nigeria’s public debt profile has hit an all-time high of N28.63 trillion as of the first quarter of the year 2020 – representing a 4.49 percent increase from the N27.40 trillion being Nigeria’s indebtedness as at the last quarter of 2019. In fiscal terms, this increment translates into a N1.23 trillion increase in Nigeria’s debt in three months.

Nigeria first ventured into external debt in the year 1958 when the World Bank granted a $58million loan to the Nigerian Railway Corporation for five years to improve Nigeria’s rail system and to build a new line into the North-eastern province. In 1964, Nigeria obtained a loan of US$13.1 million from the Paris Club of Creditor Nations for the building of the Niger Dam.

Prior to 1978, the level of Nigeria’s external debt was very low, standing at about $3.1 billion and represented barely 6.2 percent of GDP. However, by 1977/1978 when Nigeria experienced a temporary decline in oil receipts, the first jumbo loan of $1.0 billion was raised from the International Capital Market, ICM, with a relatively high rate of interest. This loan was followed by the second jumbo loan of $750 million in 1978/1979.

Nigeria’s discovery of oil and the fall in oil prices in the late 1970s had a devastating effect on government expenses; and it, therefore, became necessary for government to borrow for the balance of payment support and project financing. This increased the nation’s debt profile to US$2.2 billion in 1980.

However, in 1991, it had risen to $33.4 billion, and rather than decrease, the nation’s debt profile continued to witness an upsurge, particularly with the spate of debt servicing and the insatiable desire of political leaders to obtain loans for the execution of dubious projects. This amount currently stands at N27.40 trillion.

A major undermining factor for a country’s economic growth is its huge debt stock and as such, Nigeria’s humongous debt ratio is directly linked to the decades of misrule and financial imprudence of its military and political leaders. With incessant foreign debts being accumulated by successive governments, Nigeria became caught up on crippling foreign debt crisis which, to date, compromised its economic progress and political stability in spite of the paradox of being an oil-exporting country.

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How Nigeria entered into an external debt trap

The current waist-deep state of Nigeria’s external indebtedness is attributable to many factors, some of which, as noted by the Central Bank of Nigeria in 2017, include rapid growth of public expenditure, particularly that on capital projects, borrowing from the international community at non-concessionary interest rates, decline in oil earnings from the late 1970s and the dependence on imports which contributed to the emergence of trade arrears, and upward movements in the interest rate affected the size of the external debt stock.

On his part, former President Olusegun Obasanjo identified the following factors as leading to Nigeria’s debt crises, that is: ‘political rascality, bad governance, abuse of office and power, criminal corruption, mismanagement and waste, misplaced priorities, fiscal indiscipline, weak control, monitoring and evaluation mechanisms, and a community that was openly tolerant of corruption and other underhand and extra-legal methods of primitive accumulation.’ In addition, the Deputy Director, CBN, O.A. Ogunlana, noted the following factors as contributing to the current state of Nigeria’s indebtedness:

(i) The desire to accelerate economic growth and development: In the 1970s, Nigeria operated ambitious development plans which assumed that the huge resource inflow from crude oil would be sustained. By the late 1970s, during the first oil crisis, the momentum of project implementation could not be sustained and the country resorted to external borrowing to accelerate the pace of development.

(ii) The deteriorating commodity prices and the Dutch disease: At the time of the global oil glut, most primary commodities prices also declined. This, along with the Dutch disease which afflicted many single mineral export-dependent countries, necessitated the recourse to foreign borrowing which became imminent.

(iii) Inappropriate economic policies: Nigeria, like most developing countries, adopted some economic policies that were either not sustainable or poorly implemented. For instance, a foreign exchange control policy was poorly implemented in Nigeria. The fixed exchange rate policy in an environment of laxity and fraudulent use of import licensing created huge debt arising from trade payment arrears which became a significant proportion of Nigeria’s external debt. Furthermore, the passage and implementation of Indigenisation Decree almost totally closed avenue for foreign direct investment inflow and encouraged capital flight.

(iv) Poor debt management: There was no debt management policy in place. Indeed, in the 1980s the decree which limited the size of debt to a manageable level of N5.0 billion was disregarded as governments at various levels engaged in foreign borrowing without caution. There was also loan-project mismatch as loans of medium-term were used to finance long term gestation projects.

(v) Unfavorable terms of borrowing: External loans from the ICM, which became significant in the early 1980s carried high and floating interest rates which escalated from barely 3-4 percent in the late 1970s to 13.0 percent in 1989. Moreover, the restructuring that was undertaken particularly for the Paris Club debts did not give sufficient breathing space and therefore, made the servicing of the debt difficult.

Arrears of principal and interest were recapitalized to further compound the debt situation. Indeed, the rescheduling made debt service as well as the stock of debt to increase. For instance, the original value of Nigeria’s external debt which was $18.9 billion in 1985, increased to $35.9 billion as of December 31, 2004, in spite of cumulative debt service payments of about $36.6 billion during the same period.

(vi) The depreciation of currencies in which debt is expressed: The depreciation of the dollar against the British pound, for instance, meant that debt held in pound sterling when expressed in dollars would increase even when other parameters of the debt remained the same. Between 2002 and 2004, the stock of debt increased by over $4.0 billion as a result of currency depreciation.

(vii) The desire to alleviate poverty: This made the government cut down on allocation for debt servicing with the resultant rise in accumulated arrears of interest payment as well as penalty charges which were eventually capitalised.

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As stated by President of the African Development Bank, Dr. Akinwunmi Adesina, Nigeria is currently using 50 percent of its revenue to service its debts, compared to the average of 17 percent for other African countries. It is, therefore, commonsensical to conclude that at this rate, unless by some stroke of luck, Nigeria will not be free from debt anytime soon. Nigeria’s external indebtedness is not only worrisome but calls for urgent reforms and the adoption of sound economic practice – first which is to stop obtaining any other foreign loans.

Similarly, the Manufacturing Association of Nigeria, MAN, is reported to have called for caution, stating that the government may not be able to service rising debts and fund budgets as the economy shrunk by 6.1 percent. The acting Director-General, MAN, Mr. Ambrose Oruche, is reported to have stated thus: “Although the government is saying they need to borrow more so that they can finance themselves out of recession, we already have a debt hangover because we don’t have much revenue to pay for the ones we already borrowed and we have to be cautious on borrowing…Inflation is also going up; unemployment is going up.

So, it is a big challenge for the economy and I don’t know how we are going to cope at this period because the economy is in a very bad shape…government should implement policies that would find a way of generating revenue for the government, but not over-taxing those who are already paying tax.”

I also once noted that the recovered Abacha loots can be put to good use in offsetting the capital projects which Nigeria desperately needs, without further recourse to a foreign loan, and by extension, patching the deficits in the 2020 budget. It behooves on the Nigerian government to navigate the Nigerian boat away from the sea of indebtedness which the previous administrations have plunged the nation into.

There is no other time than this to apply sound economic principles into lessening or totally eradicating Nigeria’s debt profile. In 2005, the Paris Club, on writing off Nigeria’s $18 billion debt, noted that in arriving at the debt forgiveness option for Nigeria, it took special cognisance of the sound economic reform programmes of President Olusegun Obasanjo’s administration.

Perhaps, if the current administration puts in place sound and viable economic reforms programmes practised under the Obasanjo administration, other Nigerian creditors can also opt for a cancellation of a part of the whole of Nigeria’s debts.

Vanguard