Nigeria’s rising domestic debt

Public debt remains one of the major economic policy issues confronting the governments of poor countries globally. The debt levels, particularly among the Highly Indebted Poor Countries (HIPCs), and Low-Income Countries (LICs) generally, have for a long time raised major concerns among international financial institutions and bilateral lenders, resulting in several initiatives from the developed countries and from the international financial institutions to ease the debt burden that keeps threatening to cripple the economies of HIPCs. The initiatives range from measures to ease the debt burden through debt rescheduling to outright debt forgiveness.

These initiatives, however, have concentrated on addressing the external debt burden. External debt has therefore historically received the attention it deserves. However, domestic debt has not received a lot of attention from the international development agencies. Until recently, even low income countries themselves did not pay much attention to the potential risks and challenges of domestic debt.

Records reveal that Nigeria’s domestic debt stood at about N7.42 trillion at the end of June, against N7.18 trillion at the end of first quarter 2014- representing a 3.3 per cent increase at the end of first half of the year. The latest increase in the local debt profile was attributed to the bond issuances by DMO, amounting to over N200 billion, while it has in the last five months, cumulatively recorded about N385 billion, even as plans to raise more are in advance stages. Not surprising, the economy managers had hinted that the domestic-external debt ratio, which is lopsided in favour of the costly domestic capital, would be bridged to a ratio of 60 to 40 in 2014 by further external debts, while incentive to borrowing was underscored with the recent rebasing exercise of the Gross Domestic Product (GDP), which put the country’s debt to GDP ratio in lower single digit. The trend of the government’s domestic debt when measured by year-on-year average from 2009 to 2013, showed about 22.1 per cent yearly growth.

The current rising domestic debt profile in Nigeria is indeed a cause for concern. More so, because, critics believe that much of the borrowed funds are diverted to fund unproductive ventures. While some State governments borrow to pay salaries and other recurrent overheads. With a bloated bureaucracy that should actually be pruned, luxurious lifestyles of our ruling elites that needs to be made frugal.

Although, experts have noted that Nigeria’s public debt profile remains largely sustainable, especially when compared with peers. The overall ratio of public debt to GDP was put at about 10 per cent, which is low by emerging and frontier market standards. In fact, experts say that debt, if properly utilised, is expected to help the debtor country’s economy and the argument is still intense in favour of borrowing, on the insinuation that no nation is free of debt.

But the current level of the domestic debt is actually federal budget for almost two years. And the odds have been against Nigeria where allegations of misuse of public funds are rife. The rate of increase of domestic debt seems to suggest that there is a lack of fiscal prudence; probably borrowing in violation to the Fiscal Responsibility Act which allows borrowing only for capital expenditure and human development; borrowing for non-regenerative projects; projects that are not bankable and which at the end of the day impairs our ability to repay. Nigeria has been borrowing for recurrent expenditure to pay salaries, run overheads and for frivolous and wasteful lifestyle of those in the corridors of power.

Therefore, we believe that this rising domestic debt is creating colossal challenges for the future generation, because, extensive use of domestic borrowing can have severe implications on the economy. Hence, government should maintain a debt bank deposit ratio below 35 percent and resort to increase use of tax revenue to finance its projects as it is our believe that tax revenue is far from the optimum; divest itself of all projects which the private sector can handle including refining crude oil (petroleum product) and transportation, but should provide enabling environment for private sector investors such as tax holidays, subsidies, guarantees and most importantly improved infrastructure.