Nigerian economy and ravaging impacts of twin shocks of high debt profile, low industrial production

Mon, Apr 25, 2022
By editor


There are growing concerns that the borrowing spree of the government may not stop anytime soon, but debt sustainability of the country amid dwindling revenues to meet the debt obligations to creditors should compel the government to review its foreign debt policy.
By Goddy Ikeh

THE Nigerian economy, like many other sectors, is facing a difficult time. Presently, the twin shocks of high debt profile and low industrial production are critical and many stakeholders have expressed their concerns over the impacts of these on the fragile economy. The country’s public debt has been on the rise for decades, despite the debt relief secured by the administration of Olusegun Obasanjo. Unfortunately, the debt issue became worse during this current administration headed by President Muhammadu Buhari, with its borrowing spree and the total debt stock surging to N39.55 trillion as at December 2021.

For some Nigerian stakeholders, the concerns bother on the debt sustainability of the country amid dwindling revenues to meet the debt obligations to creditors. The review of the performance of the economy in the first quarter of this year by some economic experts showed that despite the rally in oil prices, the receipts from oil revenue have remained low due mainly to low crude oil production volume and crude oil theft.

Irked by the poor performance of the country’s economy with lingering concerns over the rising cost of diesel, logistics, foreign exchange illiquidity, domestic inflationary pressure and weakening purchasing power of consumers, the Lagos Chamber of Commerce and Industry, LCCI, has warned of tougher times for the nation’s manufacturing sector in the second quarter of the year.

According to the chamber, the sector will suffer some shocks from the challenges that have been aggravated by the global energy crisis.

Briefing the press recently in Lagos on the state of the nation, the President of the LCCI, Michael Olawale-Cole, said that the other triggers for shock included poor public infrastructure and port-related challenges as these might continue to present headwinds to the sector’s performance.

“Additionally, with the war in Ukraine aggravating disruptions to supply chains of raw materials like wheat, barley, soybeans, sunflower and corn, the rising cost of production may not abate soon,” he warned.

He expressed concerns over the nation’s rising debt profile, projecting that Nigeria’s debt stock and debt-servicing to revenue ratio will remain high in 2022 and may peak at N45.86 trillion by December 2022 due to the federal government’s plans to borrow additional N1.6 trillion, while the 2022 debt target for domestic borrowing is N2.57 trillion.

According to him, the 2022 federal government budget is now projected to have a deficit of N7.35 trillion from the approved N6.26 trillion if the recent request for additional deficit of N965.4 billion by the President presented to the National Assembly is granted.

He explained that in total, the federal government plans to add N6.3 trillion in new debts that are likely to have a higher debt service-to-revenue ratio if revenue levels do not increase significantly.

On the power sector, he said that it was becoming clearer that the national grid could not supply sufficient power to meet the nation’s electricity demand, lamenting that on the back of the epileptic power supply, businesses have had to deal with the rising cost of manufacturing, exorbitant logistics, and constrained production.

He warned that the deteriorating situation could lead to job losses as output is constrained due to the unbearable cost of production.

“If not quickly tackled, these challenges will likely subdue the GDP growth potential and projections for 2022,” he warned.

He, however, urged the government to create funding for critical infrastructure and special purpose intervention in the power sector. “The newly launched Infrastructure Corporation of Nigeria, Infracorp, has a mandate to focus on power, renewables, transport, and logistics. Infracorp will succeed in mobilizing private sector participation if we can achieve cost-reflective pricing in the power sector,” he said.

“The gas-to-power infrastructure requires an overhaul to resolve the persisting gas shortage. However, the most sustainable solution to Nigeria’s power shortages is the transition to renewable energy,” local media reports quoted Olawale-Cole as saying.

 Apart from the concerns raised by the LCCI, the International Monetary Fund, IMF, has lent its voice to some of these critical concerns of the LCCI. For instance, the IMF has warned that Nigeria and 72 other nations are high risk of debt distress.

In its recent report, entitled ‘Restructuring Debt of Poorer Nations Requires More Efficient Coordination’ the IMF said: “Low-income countries face fewer debt challenges today than they did 25 years ago, thanks in particular to the Heavily Indebted Poor Countries initiative, which slashed unmanageable debt burdens across sub-Saharan Africa and other regions.

“Although debt ratios are lower than in the mid-1990s, debt has been creeping up for the past decade and the changing composition of creditors will make restructurings more complex.

“Improvements to the Group of Twenty Common Framework for Debt Treatments—from which the 73 countries that were eligible for the G20 Debt Service Suspension Initiative, DSSI, in 2020-21 can now benefit—could clear a path through this increasing creditor complexity.

“So far, only a handful of countries have requested to use the common framework, which was launched in November 2020, underscoring the need for change to build confidence and encourage participation at a pivotal moment for heavily indebted low-income countries.”

IMF added that the debt ratios of DSSI countries have increased, partly reversing a decline seen in the early 2000s. It added that this was spurred by low-interest rates, high investment needs, limited progress in raising additional domestic revenue, and stretched systems for managing public finances.

It also said the economic shocks from the COVID-19 pandemic and the war in Ukraine were adding to the debt challenges faced by low-income countries, even as central banks begin to raise interest rates.

“About 60 per cent of DSSI countries are at high risk of debt distress or already in debt distress—when a country has started or is about to start a debt restructuring, or when a country is accumulating arrears,” the report added.

“Among the 41 DSSI countries at high risk of or in debt distress, Chad, Ethiopia, Somalia (under the HIPC framework), and Zambia have already requested a debt treatment. Around 20 others exhibit significant breaches of applicable high-risk thresholds, half of which also have low reserves, rising gross financing needs, or a combination of the two in 2022.

“On the domestic side, difficult trade-offs will exist between the need to restructure sovereign debt owed to domestic banks, in some cases, and the impact of such restructurings on financial sector stability and the capacity of domestic banks to finance growth.”

According to the global financial institution, local currency debt for the median DSSI country doubled from seven per cent of Gross Domestic Product (GDP) in 2010 to 15 per cent in 2021.

It stated that for those DSSI countries with market access, the share more than tripled from eight percent to 28 per cent in 2021.

“Many of these DSSI countries have also experienced a tightening of sovereign-bank links, with larger holdings of domestic sovereign debt at domestic banks.”

On the way forward, IMF recommended putting in place mechanisms that ensure coordination and confidence among creditors and debtors.

It added that improvements to the G20 Common Framework could play an important role by ensuring broad participation of creditors with fairer burden-sharing.

“Experience so far shows that greater clarity on restructuring steps, earlier engagement of official creditors with the debtor and with private creditors, a standstill in debt service payments during negotiations, and specifying the mechanics of comparability of treatment, is still needed.”

But the reactions of the federal government to these concerns are not encouraging. For instance, President Buhari had earlier defended his government’s decision to source loans from China, saying anyone willing to help Nigeria’s infrastructure is welcome.

Speaking during an exclusive interview on Channels Television, President Buhari stated that whenever there was a need to secure more foreign loans, his administration would do so.

He equally erased fears in some quarters that the country might soon be plunged into a debt trap.

“We take that (loans) where it is necessary. I told you now of something, what it is used to be between Lagos and Ibadan alone not to talk of the rest of the country,” he said.

“But we got the Chinese to help us in the rail and the roads, how can we turn that down? If we had turned that down, maybe between Lagos to Ibadan, you will have to walk.

“So the Chinese are welcome, anybody that is prepared to come and help us and our infrastructure to do the roads, the rail and power will be welcomed,” he added.

According to data from the Debt Management Office, Nigeria has borrowed $2.02 billion as loans from China from 2015 and the country’s debt portfolio from China has risen to $3.40bn as of March 31, 2021.

For the Director-General of DMO, Patience Oniha, the various social challenges in the country, as well as global occurrences, have also increased the country’s debt.

“Borrowings are essentially for Capital Expenditure and Human Capital Development as specified in the Fiscal Responsibility Act 2007.

“Having witnessed two economic recessions, we have had to spend our ways out of recession, which contributed significantly to the growth in the public debt.

“It is unlikely that our recovery from each of the two recessions would have been as fast without the sustained government expenditure funded partly by debt,’’ she said. According to her, the insecurity situation has also resulted in increased borrowings.

“To compound matters, the country has technically been at war with the pervasive security challenges across the nation.

“This has necessitated massive expenditures on security equipment and operations, contributing to the fiscal deficit.  Defence and security sector accounts for 22 per cent of the 2021 budget,’’ she said.

While giving an update of the country’s debt profile recently, Oniha said that the most viable solution to the country’s fiscal challenge was to grow sources of revenue and plug all leakages.

“We must, however, continue to rationalise our expenditure as we cannot afford waste.

“In reality, our largest expenditure items are currently personnel cost, debt service and capital expenditure, which between them account for 85 per cent of the 2022 budget.

“There is very little scope for a cut in any of these over the medium term,’’ she said.

According to her, revenue generation remains the major fiscal constraint of the federal government.

“Systemic resource mobilisation problem was also compounded by the recent economic recessions.

“Several measures are being instituted under government’s Strategic Revenue Growth Initiatives to improve revenue and entrench fiscal prudence with emphasis on achieving value for money,’’ she said.

She, however, said that borrowing was not a bad thing as governments around the world borrowed whenever they needed to.

The director-general said that borrowing for infrastructure development did not also imply that the government was creating a burden for the future generations as the infrastructure would eventually be inherited and utilised by that generation.

However, the consequences of poor economic management are huge and not limited to the long-term rate of the depreciation of the naira. According to the International Monetary Fund, the Naira loses 10.6% of its value annually. The IMF explained that this rate is 1.5 times higher than the long-term rate of the currencies of other emerging market and developing economies at 7.2 per cent, and Sub-Saharan Africa at seven per cent over the same time period.

In addition, the IMF has also advised the Nigerian government to stop subsidising fuel and this can only be effectively done by either rehabilitating the existing refineries or building new refineries.  And in order to reduce government spending, the federal government may have to implement the Stephen Oronsaye report, which recommended merging or outright scrapping of some ministries, departments and agencies of government.

Indeed, the implementation of the report and the other recommendations of the LCCI, which included managing the nation’s rising debt profile, tackling budget deficit, higher debt service-to-revenue ratio and tackling the epileptic power supply and the rising cost of manufacturing, exorbitant logistics, and constrained production. The warning by the LCCI that the deteriorating situation in the economy could lead to job losses as output constrained due to the unbearable cost of production should be taken seriously since these challenges will likely subdue the GDP growth potential and projections for 2022.

– Apr. 25 2022 @ 18:16 GMT |   A I.