The Sun News

The high cost of debt servicing

THE World Bank’s recent expression of concern about Nigeria’s increasing debt servicing costs in relation to dwindling revenue echoes the worries of some government officials and revenue-generating agencies. In its recent Global Economic Prospects Report, the international financial institution noted with dismay that the current optimism over Nigeria’s economic recovery is tempered by huge debt servicing and foreign exchange controls. 

Specifically, the bank observed that the cost of servicing Nigeria’s debts on both the domestic and external fronts has risen, in contrast to the revenue earned by government. The bigger concern, the bank further stated, is the possible unsustainability of such debt servicing, adding that while the debt servicing costs in other economies remain sustainable, that of Nigeria is being dragged down by forex depreciation and increased recourse to non-concessional borrowing for infrastructure development.

Available data seem to validate the World Bank’s concern about Nigeria’s debt servicing costs. For instance, Federal Government’s interest to revenue ratio rose from 33 percent in 2015 to 59 percent in 2016. While government’s income for last year was under N6 trillion, it spent a hefty N1.475trn on debt servicing between January and December, 2016. Out of this amount, N1.044trn was used to service local debts, while N86bn was paid as interest on capitalised loans.  No doubt, the cost of servicing debts remains progressively high, while collectible revenue continues to fall.

Out of the current N7.44trn federal budget, N2.2trn, or 23 percent of aggregate spending, is voted for debt servicing. In 2014 and 2015, it was N712bn and N943bn respectively, out of a budget of N4.91trn and N4.69trn. Consequently, the World Bank has advised that if the Nigerian economy which went into recession last year must recover, government must take proactive measures on public debt management in order to roll over risks that could hamper economic recovery.

Statistics from the Debt Management Office (DMO) are also in line with the World Bank’s timely warning. According to the DMO, the Federal Government has in five years (2012-2016) paid interest totaling N4.8trn to banks and other investors. This is interest on loans to government from the domestic market through Federal Government of Nigeria (FGN) bonds and Treasury Bills issued by the Central Bank of Nigeria (CBN).

Altogether, the crucial question is: How can Nigeria stop its debt servicing costs from spiralling out of control? First, government should be more cautious in borrowing. The Minister of Finance, Mrs. Kemi Adeosun, who had earlier last week said Nigeria would no longer borrow to fund the budget, recanted before the week ran out.  She later said the country would continue to borrow to fund the projected N2.356trn fiscal deficit in the 2017 Budget.

Earlier, government had planned to borrow $2 billion from international lenders such as the World Bank and the African Development Bank (AfDB). The loans had been stalled following government’s refusal to impose key fiscal reforms such as allowing the forex rate to float freely.  Reducing borrowing is a good way to cut the cost of debt servicing. Caution should, indeed, be the watchword because the cost of servicing  the country’s debts has become alarming.

Efforts should also be intensified to improve revenue generation as it is the most realistic way to reduce the debt service/revenue ratio. In this regard, a clearer and more coherent approach is expedient. The Economic Recovery Growth Plan (ERGP) articulates this option, and this is the time to rev up the non-oil revenue drive.

Overall, the debt service ratio will begin to reduce through a package of spending that will stimulate private consumption and investment by businesses. Capital expenditure, which takes 30 percent of the 2017 budget, needs to be sustained throughout the four-year duration of the ERGP (2017-2020). Indeed, improving the national revenue base is key to avoiding reliance on borrowing to fund capital projects.

We advise a broadening of non-oil revenue and leveraging on the modest progress already being made by non-oil revenue collecting agencies like the Federal Inland Revenue Service (FIRS) and the Customs Service. Ongoing efforts to expand our tax to GDP ratio are also welcome.

Nigeria’s tax to GDP ratio, which currently stands at six percent, is one of the lowest in the world. At least 15 percent of tax to GDP ratio is required to achieve sustained growth. Nothing should be taken for granted in the effort to exit the current recession and jumpstart growth.

 

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